What comes to your mind when you hear the word “Discounts”?
Recently, during the audit season, one of our clients inquired about the treatment for trade discounts. Have you ever been confused between accounting for trade discounts and cash discounts?
Let us see the difference between a trade discount and cash discount!
I hope the difference between trade discounts and cash discounts is now clear.
Let’s have a look at what the related IFRS & IAS standards say:
(a) From the customers perspective:
IAS 2 - Inventories, states “the costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.”
From this, it is clear that trade discounts are deducted in determining the cost of purchase and do not need to be accounted for separately, whereas cash discounts should be accounted for and adjusted with the cost of sales.
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(b) From the sellers perspective:
IFRS 15 - Revenue from contracts with customers, provides a five-step model for revenue recognition. The significant step for our discussion is “Determining the transaction price”, which refers to the amount of consideration an entity expects to be entitled in exchange for transferring the promised goods or services to a customer, excluding amounts collected on behalf of third parties.(like sales tax and service tax)
Consideration means the amount promised in a contract and sometimes, the amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items.
An entity shall estimate an amount of variable consideration by using either of the following methods,
depending on which method the entity expects to better predict the amount of consideration to which it will be entitled.
Share Your Insights
Please share your insights and experiences regarding the above in the comment box!
