Runway Discount (Runway) has instituted the “Refer-a-Friend” program in order to increase its customer base. When existing customers refer a new customer to Runway’s website and the new customer purchases Runway merchandise, the existing customer receives a $25 referral credit toward their next purchase. This program does not have any restrictions and is open to all existing Runway customers. Runway believes the $25 referral credit is the fair market value of the cost that would be incurred if Runway used the services of an unrelated third party in order to acquire a new customer. Runway is requesting guidance how the customer referral credit should be accounted for in their books and records. Runway has also advised they will be …show more content…
FASB ASC Section 605-50 addresses revenue recognition for customer payments and incentives. According to FASB ASC par. 605-50-45-2, consideration to a customer is considered a reduction of revenue unless two conditions are met:
a. The vendor receives an identifiable benefit in exchange for the consideration which is separate from the purchase of the vendor’s products, and
b. The fair market value of the benefit can be reasonably estimated.
This is further clarified in the converged revenue recognition standard issued by FASB and IASB in May 2014. (deBell, Stegall, Young, & Coffey, 2014) The converged revenue recognition standard is known as FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and IFRS No. 15, Revenue from Contracts with Customers, respectively. FASB ASU No. 2014-09 par. 606-10-32-25 states that the payment to the customer is in “exchange for a distinct good or service.” However, according to FASB ASU par. 606-10-55-43, the business should only account for the related expense when the customer exercises the option to purchase additional items. …show more content…
Runway is able to estimate a fair market value of the benefit it is receiving from the “Refer-a-Friend” program, and should be allowed to claim the referral credit as a marketing expense on its Income Statement, in accordance with FASB ASU No. 2014-09 par. 606-10-55-43. When Runway elects to convert to IFRS standards, Runway would refer to IFRS No. 15 for transaction reporting guidance.
Board, F. A. (2014). FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). Stamford.
Bragg, S. (2013, January 25). What is a deferred cost? Retrieved from Accounting Tools: http://www.accountingtools.com/questions-and-answers/what-is-a-deferred-cost.html deBell, T., Stegall, R., Young, P., & Coffey, B. (2014). In Depth - Revenue from contracts with customers. PricewaterhouseCoopers LLP.
Financial Accounting Standards Codification. (2014). Stamford: Financial Accounting Standards Board.
International Accounting Standards Board. (2014). International Financial Reporting Standard No. 15. International Accounting Standards