NEGATIVE REVENUE

Query
Pay Gate runs a website which provides a market place for vendors to sell their merchandise to different buyers. The buyers can open a wallet on Pay Gate by paying cash or using a debit/credit card and then use that wallet to buy goods through that website from vendors. Pay Gate earns a commission from the vendor for every sale made. Pay Gate is desperately seeking to expand in the market and hence provides a sizable cash back incentive to buyers. The commission earned from vendors is much lower than the cash back incentive to buyers. Consequently the overall revenue earned by Pay Gate is negative. How is such revenue presented?

Author’s Response
Many such interesting issues have emerged since the issuance of IFRS 15 Revenue from Contracts with Customers. These issues have gained urgency in India because it makes IFRS 15 (Ind AS 115) mandatory with immediate effect. These issues and the following discussions would be also relevant for Indian GAAP purposes. The Joint Transition Resource Group for Revenue Recognition (TRG) discussed a number of implementation issues on IFRS 15, including the one raised in the query above.

Under IFRS 15, an entity is required to determine if a consideration that it pays a customer is for a distinct good or service. Consider a manufacturer sells to its customer (eg Retailer) certain goods and earns revenue. It also pays the Retailer a fee for prominent display of those goods. Because the payment to the Retailer is not for a distinct good or service, the manufacturer will reduce the fee paid from the revenue it earns from the Retailer.

In the above example, if the Manufacturer paid to the Customer (who is also an advertiser) for carrying a huge advertisement on an advertising space it owns outside the retail outlet, this would be treated as a distinct service received from the customer. Consequently, revenue would be presented gross and the fee paid to the customer (advertiser) would be treated as an advertising expenditure. IFRS 15 also has another interesting concept, where the customer’s customer is also treated as the customer of the entity. Consider the manufacturer sells to its customer (the Retailer) certain goods, and those goods carry some cash coupons which the final buyer (Retailer’s customer) redeems with the manufacturer. Because under IFRS 15, a customer’s customer is the customer of the entity, revenue would be presented net of the cash coupon amount.

TRG members did not agree on whether the new standards are clear as to whether the requirements will also apply to all payments made to any customer of an entity’s customer outside the distribution chain. For example, in an arrangement with a principal, an agent and an end-customer, TRG members agreed it was not clear whether the agent’s fee would have to be reduced for any consideration that the agent may pay to the end-customer (i.e., its customer’s (the principle’s) customer). Some agents may also conclude that they have two customers –the principal and the endcustomer- in such arrangements. TRG members agreed that agent will need to evaluate their facts and circumstances to determine whether payments made to an end-customer will be treated as a reduction of revenue or a marketing expense. TRG member observed that there is currently diversity in practice on this issue and that it may continue under the new standards, absent further application guidance.

On negative revenue, TRG members felt that if negative revenue is determined on an overall customer relationship basis, one view is that entities should present negative revenue as performance obligations are satisfied. An alternative view is that entities should reduce cumulative customer revenue to zero and reclassified the remaining negative revenue as expenses in the period such determination is made.

If
negative revenue is determined based on a specific contract, potential
views are (a) entities should present negative revenue as performance
obligation are satisfied or (b) entities should reclassify negative
revenue as expenses in the period determined. The latter would not
result in negative revenue on a specific customer contract. If
determined on a specific contract basis, there would likely be far fewer
instance of negative revenue given payments to a customer won’t be
linked to a specific revenue contract in many, if not most, cases.

Overall,
in the query raised above, the author believes that multiple views are
possible at this juncture, absent further application guidance:

1.
Disclose revenue as a negative number, on the basis that consideration
received from a customer should be reduced by a payment made to a
customer or a customers’ customer for goods and services that is not
distinct.

2. Disclose revenue at the gross amount and the
consideration paid to the buyers in the fact pattern be treated as a
marketing expense incurred for acquiring eye balls.

3. Disclose
revenue at a zero sum, and present the excess of cash back incentive
paid to buyers over revenue as a marketing expense. This is done on the
basis that revenue is a reward and should not be a negative number.

The author recommends that the ICAI interact with the TRG group and ensure that an amicable view is reached.