Online Sales IFRS

Transcript

Shreeya

Hello, and welcome back to our podcast series “On the top shelf”, which deals with topical issues in IFRS that impact clients operating in the retail and consumer industry. 

My name is Shreeya and I am a Senior Manager in PwC’s Corporate Reporting Services.

Today I’ve got Ronel Fourie on the podcast. Ronel is an Associate Director in the Corporate Reporting Services team and leads the South African retail and consumer markets reporting team. Welcome back to the podcast!

Ronel

Thanks Shreeya, glad to be back on the podcast!

Shreeya

Ronel, I was reading through the 2022 PwC Consumer Insights survey and saw an interesting statistic. In South Africa, approximately 35% of customers have made the switch to buying products online.

Consumers empowered by technology are more likely to use comparison sites to seek product availability and shop across multiple retailers. I think, off the back of the pandemic, many consumer market entities have expanded their channels to market, in particular, using online purchase options.

That, surely, brings with it a number of accounting considerations!

Ronel

Yes, it does. 

Let’s think about the number of channels to market.

New channels will often result in different shipping terms and might include partnering arrangements with delivery service providers etc. 

For new arrangements, management will need to consider whether the delivery terms introduce a separate performance obligation and determine when control of the goods transfer to the customer (that is, upon transfer to the carrier or upon delivery).

Specifically, management will need to consider whether or not control of the goods has transferred to the customer before delivery. 

If yes, then the obligation - or promise - to deliver the goods is likely to be a separate performance obligation. 

If delivery is not a separate performance obligation then the action of delivering the goods is a fulfillment activity.

Shreeya

Ronel,  you’ve mentioned something quite important there - being the principal vs agent analysis for all of the parties that form part of the arrangement. 

Can you unpack that for us a bit more? 

Ronel

Let me expand. If an entity undertakes what is commonly known as ‘drop shipments’, where you take an order from a customer - maybe online - for the purchase of goods and then liaise with the supplier to deliver these goods directly to the customer on your behalf  - that could suggest some analysis is required.

For example, if the supplier has full discretion when establishing the price of products pertaining to the drop shipments, it invoice customers in its own name and it is responsible for the overall management of the transaction and ensuring the customer receives the product, chances are that the supplier might be the ‘principal’ in that arrangement. 

Shreeya 

Thank you for recapping those important ‘principles’ for us.

I think beyond the principal/agent issue - there is also disclosure to consider, right?

If an entity’s online business increases, it might now comprise a significant portion of the entity’s combined revenue. Management should consider if it has another category of revenue for its disaggregated revenue disclosure (IFRS 15.114) or a new operating segment that requires disclosure (IFRS 8.13) if there is discrete information that is regularly reviewed by the chief operating decision maker.

Ronel

Yes, we’ve had regulators actually asking this question when it comes to IFRS 15 disclosures by sales channel. It’s important for entities to monitor that split. Companies should also be cognisant of how they speak about their product and sales channels in the public domain. With the shift to omnichannel sales for retailers, online sales compared to in store sales often forms part of discussions with analysts.

A growth in online sales, and frequent attention being drawn to omnichannel marketing in investor presentations, might suggest a need for disaggregation of revenue by sales channel. The standard asks entities to disaggregate their revenue into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Shreeya

I think at this point I’d like to pivot the conversation to impairment, IAS 36. 

The growth of online sales introduces cash flows that might or might not be independent of physical stores, and determining CGUs as well as allocating such online sales to stores/CGUs can be difficult to apply in practice, and judgment might be required.

Do you have any helpful hints in this regard?

Ronel

IAS 36 requires identification of Cash generating Units - CGUs - for impairment testing purposes that are the ‘smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets’ [IAS 36 para 6]. 

Typically, the CGU will be individual retail stores, because each location is considered to operate independently.

For impairment testing we need to allocate online sales to a CGU.

In order to evidence that a sale is derived from a particular retail store, it is important that there is a demonstrable and direct link between the sale and the store.

Goods ordered online from the comfort of the customer’s home and delivered directly from a specific store to the customer or to an agreed collection point serviced by a specific store would be allocated to the specific store CGU – the link between online order and store is established, because the store provides the goods. 

However, sales ordered online from the customer’s home and delivered from a central warehouse would not typically be allocated to a specific store, even if the customer has them shipped to a location in the vicinity of a specific retail store or the customer’s shipping address is closest to a particular store.

But this remains quite judgemental.

Shreeya

Yes, IAS 36 Impairment testing can get really tricky!

Ronel, I think we’re all feeling the pressure of inflation and rising costs. If anything, it’s perhaps our wallets that are being somewhat impaired. It’s only natural for stores to offer discounts - whether it’s in store or over digital platforms. 

What should retailers be thinking about when it comes to granting discounts?

Ronel

Shreeya, when it comes to discount programs - things can get somewhat tricky because the terms of each deal need to be assessed. Especially where retailers get creative in how they structure any discounts granted to customers. That’s the first thing to bear in mind - analyze each discount structure for its own facts and circumstances.

But let’s talk about a simple example - a discount granted on check out at the till point.

Let’s say there’s a sale on widgets and a customer buys 3 widgets for R5,400. On a stand alone basis, the widgets would be priced differently such that the total stand-alone selling prices come to R6,000. There is thus a discount of R600.

Revenue would be limited to the actual contractual selling price of R5,400. The retailer would apply the IFRS 15 model and allocate the total transaction price of R5,400 to each good being sold. This might make little difference if control of the widgets are transferred immediately -for example, when paying for everything at a till point and taking it home. But if there are different points in time for delivery, one would expect the difference in the timing of the revenue recognition. 

Providing discounts is usually an IFRS 15 task - one would have to assess them through the lens of the revenue standard if the discount is provided within a revenue contract with a customer. Another important point to consider is that IFRS 15 only applies to contracts with customers. Things can get a bit more tricky if, in the background, the supplier is funding the discount. In that case, there might be accounting considerations for the supplier and customer discount.

Shreeya

Thanks Ronel for those perspectives.

We’ve chatted a lot in this podcast!

We have covered some reminders about changes in sales channels - with a reminder to watch out for principal/agent issues and revenue disaggregation. We thought about how to allocate online sales to cash generating units for the purposes of impairment and we touched briefly on accounting for discounts. 

Thank you for joining us today, Ronel, and I hope you’ll be back again to share some knowledge with us.

Ronel

Thank you Shreeya. It was great joining in on the podcast and I hope to be back in the aisle soon - looking up at the Top Shelf!

Shreeya 

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