Premiums, Rebate Discounts, and

Other Deferred Income Items

Premiums
Premiums are articles of value such as toys, dishes, silverware and
other goods given to customers as a result of past sales or sales
promotion.

These items of premiums shall be useful to the customers to entice

them to really do the effort of following the terms and conditions of the
sales promotion. These terms and conditions contain some or all of the
following elements:
1. Inclusion of coupons, vouchers, or their equivalent in every
product sold. A portion of the product sold may also satisfy this
element, such as bottle caps.
2. A specified number of coupons or vouchers are presented to
redeem premiums, free of charge
3. An amount of cash may also be collected from the customers. In
effect, in this case, the premium is effectively a discount
Accounting for Premiums
Before the effectivity of the accounting standard PFRS 15, Revenue
from Contracts with Customers, premiums are generally accounted for
under PAS 37.
However, starting January 1, 2018, the accounting for premiums
became such a grey area because of the differing opinions among
academicians.
Accounting for Premiums
PAS 37 PFRS 15
Argument in favor of using the The net cost of premiums The distribution of premium is a
approach represents an obligation that the distinct performance obligation
entity already incurred
Initial accounting requirements Recognition of expense and Allocation of a portion of revenue
corresponding provision liability as a “contract liability”
Subsequent accounting Reduction of liability when the Recognition of revenue and
requirements premiums are distributed corresponding expense when the
premiums are distributed
Accounting for Premiums under PAS 37
Under PAS 37, the following are accounting procedures for premiums:
a. Recognition of expense and corresponding liability during the
year of sale of related products. The pro-forma entry is as
follows:

Estimated Premium Expense xx

Estimated Premium Liability xx

The estimated premium expense is equal to the expense or liability per

unit multiplied by the number of premiums expected to be redeemed.
Accounting for Premiums under PAS 37
Under PAS 37, the following are accounting procedures for premiums:
b. The amount of expense or liability per unit of premium is
computed as follows:

Unit cost of item to be distributed as premiums xx

Add: Handling costs, if any xx
Less: Amounts to be received from redeeming customers xx
Expense of liability per unit of premium xx
Accounting for Premiums under PAS 37
Under PAS 37, the following are accounting procedures for premiums:
c. The total number of premiums expected to be redeemed is
computed as follows:

Number of coupon or voucher included per unit of sold product xx

Multiply by the number of sold products xx
Total number of coupons distributed xx
Multiply by the expected redemption rate xx
Total number of coupons to be redeemed xx
Divide by the number of coupons needed per one premium xx
Total number of premiums expected to be redeemed xx
Accounting for Premiums under PAS 37
Under PAS 37, the following are accounting procedures for premiums:
d. Premiums purchased are considered as prepaid asset and
normally recorded in an account named as “Premium” or
“Premium Inventory”. Despite this, these items shall not be
included in the entity’s inventory balance.
Accounting for Premiums under PAS 37
Under PAS 37, the following are accounting procedures for premiums:
e. The distribution of premiums reduces the amounts of premium
liability and premium inventory. This also affects other accounts
as indicated in the following pro-forma entry:

Estimated Premium Liability xx

Cash (if any) xx
Premium Inventory xx
Cash (if any) xx
Accounting for Premiums under PAS 37
Under PAS 37, the following are accounting procedures for premiums:
f. In summary, the transactions affecting the premium liability
account are the following:
Premium Liability
Debit Credit
Actual redemptions xx xx Beginning balance
Ending balance xx xx Premium expense
Illustration
During 2023, Geronimo Company’s first year of operations, it offered a sales promotional program wherein it included one
coupon for each unit of its product. Five of these coupons plus P20 shall be presented to redeem a special wall clock with a cost
of P120 per unit. Handling costs are estimated to be P15 per unit. For the year, the Company was able to sell 200,000 units of its
product (@P190.80 unit selling price) but expects that only 40% of the coupons will be presented for redemption. A total of
16,500 wall clocks were acquired and by the end of 2023, 12,500 of these were distributed to customers.
To compute for the amount of expense or liability per unit of Journal Entries:
premium: Purchase of Wall Clocks:
Unit cost of item to be distributed as premiums P120 Premium P1,980,000
Add: Handling costs, if any 15 Cash P1,980,000
Less: Amounts to be received from redeeming
customers 20 Recognition of Premium Liability:
Expense of liability per unit of premium P115 Estimated Premium Expense 1,840,000
Estimated Premium Liability 1,840,000
To compute for the number of premiums expected to be redeemed
Number of coupon or voucher included per unit Redemption of Premiums:
of sold product 1 Estimated Premium Liability 1,437,500
Multiply by the number of sold products 200,000 Cash 250,000
Total number of coupons distributed 200,000
Premium Inventory 1,500,000
Multiply by the expected redemption rate 40%
Cash 187,500
Total number of coupons to be redeemed 80,000
Divide by the number of coupons needed per
one premium 5
Total number of premiums expected to be
redeemed 16,000
Accounting of Premiums under PFRS 15
Under PFRS 15, the distribution of premiums to customers is a distinct
performance obligation. This is because it is an option to acquire
additional goods that provides a material right to the customer that it
would not receive without entering in the related sales contract in the
first place.
Accounting of Premiums under PFRS 15
For premiums, the material right given to the customer can be in either
of the following:
a. Acquisition of premium items, free of charge, by just presenting
a specified number of coupons; or
b. Acquisition of premium items at a relatively low amount, by just
presenting a specified number of coupons plus specified amount
of cash
Accounting of Premiums under PFRS 15
Without the original sale transaction, customers cannot get hold of any
coupons, which in turn make them unable to redeem the items offered
as premiums. As a result, the following are the relevant accounting
procedures for premiums under PFRS 15:
1. The transaction price shall be allocated between goods sold and
contract liability – premiums. The allocation is generally based
on the relative stand-alone selling prices of the goods and the
premiums.
Accounting of Premiums under PFRS 15
2. The estimated stand-alone selling price of premiums is equal to the
amount of discount adjusted by the likelihood that the coupons will
be redeemed. The computation of the stand-alone selling price of
premiums is as follows:

Discount per unit of premium xx

Multiply by: Expected number of premiums to be redeemed xx
Estimated stand-alone selling price of premiums xx
Accounting of Premiums under PFRS 15
The discount per unit of premium is computed as:

Unit cost of the items to be distributed as premium xx

Add: Handling Costs xx
Less: Amount to be received from the customers xx
Discount per unit of premium xx
Accounting of Premiums under PFRS 15
The expected number of premiums to be redeemed:

Number of coupon or voucher included

per unit of sold product xx
Multiply by the number of sold products xx
Total number of coupons distributed xx
Multiply by the expected redemption rate xx
Total number of coupons to be redeemed xx
Divide by the number of coupons needed per
one premium xx
Total number of premiums expected to be redeemed xx
Accounting of Premiums under PFRS 15
The pro-forma entry to record the transaction on a total basis is as
3. The allocation can now be made as follows:
follows:

Allocation to Sold GoodsReceivable

Cash/Accounts xx
Sales Revenue xx
Contract Liability-premiums xx
Allocation to Premium

The rationale of allocation is that a portion of the transaction price initially

received from customers is considered as an “advance payment” that will only
be earned by the entity upon actual distribution of premium
Accounting of Premiums under PFRS 15
4. Subsequently, as the premiums are distributed, a proportionate
amount of the contract liability is recognized as income:

Contract Liability-premiums xx
Income from premiums xx
Accounting of Premiums under PFRS 15
5. A corresponding entry shall be made for the expense and other
accounts affected:

Expense from premiums xx

Cash xx
Premium Inventory xx
Cash xx
Illustration
During 2023, Geronimo Company’s first year of operations, it offered a sales promotional program wherein it included one
coupon for each unit of its product. Five of these coupons plus P20 shall be presented to redeem a special wall clock with a cost
of P120 per unit. Handling costs are estimated to be P15 per unit. For the year, the Company was able to sell 200,000 units of its
product (@P190.80 unit selling price) but expects that only 40% of the coupons will be presented for redemption. A total of
16,500 wall clocks were acquired and by the end of 2023, 12,500 of these were distributed to customers.
In this case, the total stand-alone selling price of the products sold is P38,160,000, which is also equal to the transaction price.
The stand-alone selling price of the premiums is estimated as follows:
Discount per unit of premium P115
Multiply by: Expected number of premiums to be redeemed 16,000
Estimated stand-alone selling price of premiums P1,840,000
The allocation of the transaction price based on the relative stand-alone selling price is as follows:

Sold Goods:

Premium:
Illustration
During 2023, Geronimo Company’s first year of operations, it offered a sales promotional program wherein it included one
coupon for each unit of its product. Five of these coupons plus P20 shall be presented to redeem a special wall clock with a cost
of P120 per unit. Handling costs are estimated to be P15 per unit. For the year, the Company was able to sell 200,000 units of its
product (@P190.80 unit selling price) but expects that only 40% of the coupons will be presented for redemption. A total of
16,500 wall clocks were acquired and by the end of 2023, 12,500 of these were distributed to customers.
The entry to record the allocation is as follows:
Cash/Accounts Receivable P38,160,000
Sales Revenue P36,404,640
Contract Liability – premiums 1,755,360

The actual distribution of the premium during 2023 shall result to the recognition of income from premium as follows:
Contract Liability – premiums 1,371,375
Income from premiums 1,371,375

Premiums Expense 1,437,500

Cash 250,000
Premiums Inventory 1,500,000
Cash 187,500
Comparison of the Two Standards
PAS 37 PFRS 15
Amount recognized as sales Transaction Price Transaction Price less Allocation to
revenue Premiums
Timing of recognition of premium During the period the sales
expense revenue is recognized During the period the premiums
Timing of recognition of income Not applicable are actually distributed
from premium
Ending balance of liability Generally higher Generally lower
Customer
Loyalty
Program
Accounting for Customer Loyalty Programs
The accounting will depend on whether the entity is acting as the
principal or as an agent:
Principal Agent
An entity is a principal if the entity controls a promised An entity is an agent if the entity’s performance
goods or service before it transfer the goods or service obligation is to arrange by another party.
to a customer
Sample: Sample:
• SM Advantage Card • Globe Rewards
• Puregold Suki Card • Shopee Coins
The Entity is the Principal
Similar to premiums, customers have a material right that they would
not receive without entering into the loyalty program. That material
right is the ability to acquire, for free, the goods or services offered by
the entity. The following are the relevant procedures:

1. A portion of the transaction price shall be allocated based on the

stand-alone selling price of the goods or services and stand-
alone selling price of “points”
The Entity is the Principal
The stand-alone selling price of “points”, which primarily is based on
the amount of discount that the customer can avail, shall be estimated
as follows:

Discount amount provided per point xx

Multiply by the expected rate of usage by the customers xx%
Stand-alone selling price of a point xx
Multiply by the number of points distributed xx
Estimated stand-alone selling price of points xx
The Entity is the Principal
2. The allocation is very similar to the allocation of transaction price in
premiums. This is recorded in a total basis as follows:

Cash/Accounts Receivable xx
Sales Revenue xx
Contract Liability – Points xx

Initially, the portion allocated to points shall be deferred as a liability

The Entity is the Principal
3. As the points are redeemed and the corresponding goods or
services have been provided, the entity shall recognize proportional
amounts of contract liability – points as income from points.

4. Changes in the estimate of the total number to be redeemed shall

be considered as a change in accounting estimate and shall be
accounted for prospectively. Specifically, the total amount initially
allocated points shall not be changed. In other words, income from
points during the period of change is equal to a certain amount of
catch-up adjustment.
Illustration
During 2023, Cordova Company instituted a customer loyalty program wherein for every P150 sales amount, the entity will give 1
point. Each point will reduce the customers’ payment for goods or services in the future by P1.00. Based on the Company’s
reliable estimate, only 80% of these points will be redeemed. For 2023, the Company reported gross sales of P30,000,000 (before
the allocation). During 2023, the customers have used 90,000 points. And during 2024, the customers used 50,000 points. In
addition, the Company changed its estimate of total points to be redeemed at 170,000 points.
The entry
stand-alone
to record
selling
the price
transaction
of initially
and sold
the related
goods orallocation
servicesisisas
P30,000,000,
follows: which is also equal to the transaction price. On the
other hand, the estimated stand-alone selling price of points is computed as follows:
Discount amount
Cash/Accounts Receivable
provided per point P30,000,000P 1.00
Multiply bySales
the Revenue
rate of usage by the customers P29,840,849
80%
Stand-aloneContract
sellingLiability
price of –a points
point P 0.80
159,151
Multiply by the number of points distributed 200,000
Estimated stand-alone selling price of points P160,000

Next, the transaction price shall be allocated as follows:

Sold Goods:

Points:
Illustration
During 2023, Cordova Company instituted a customer loyalty program wherein for every P150 sales amount, the entity will give 1
point. Each point will reduce the customers’ payment for goods or services in the future by P1.00. Based on the Company’s
reliable estimate, only 80% of these points will be redeemed. For 2023, the Company reported gross sales of P30,000,000 (before
the allocation). During 2023, the customers have used 90,000 points. And during 2024, the customers used 50,000 points. In
addition, the Company changed its estimate of total points to be redeemed at 170,000 points.
The entry to record the usage of the 90,000 points will be:
Contract Liability – Points 89,522
Income from points 89,522
Because of the change in the estimate, the income from points in 2024 is computed as follows:
Cumulative income to be recognized P131,066
Less: Income recognized in 2023 89,522
Income to be recognized in 2024 P 41,544

The entry to record the income from points in 2024 is as follows:

Contract Liability – Points 41,544
Income from points 41,544
Accounting if the Entity is an Agent
When an entity that is an agent satisfies a performance obligation, the
entity recognizes revenue in the amount of any fee or commission
which it expects to be entitled to in exchange for arranging for the
other party to provide its goods and services.

The entity will normally recognize revenue right upon the distribution
of points to the customers. The amount of revenue to be recognized is
on a net basis.
Illustration
Eugenio Company, an operator of a supermarket, participated in the customer loyalty program introduced by Rubio Company, a
gasoline station operator. For each P300 sales, Eugenio Company will grant 4 points to the customer. Each point is equivalent to
P0.50, which can be used as a partial or full payment for Rubio Company’s products. For every point granted to the customers,
Eugenio Company will pay P0.40 to Rubio Company. It is expected that the customers will only use 90% of the points. During the
year, Eugenio Company reported P24,000,000 gross sales.
The entry
stand-alone selling
to record the price of initially
allocation sold goods is P24,000,000, which is also equal to the transaction price. On the other hand,
is as follows:
the estimated stand-alone
Cash/Accounts selling price of points is computed as:
Receivable P24,000,000
Discount
Salesprovided
Revenueper point P 0.50 P23,856,859
Multiply by expected
Contract Liabilityrate of usage by customer
– points 90% 143,141
Stand-alone selling price of a point P 0.45
Multiply by Number of points distributed 320,000
Estimated stand-alone selling price of points P144,000
transaction
The entry pricethe
to record shall be allocated
recognition as follows:
of income from points:
Sold Goods: Contract Liability – points 143,141
Cash 128,000
Income from points 15,141
Points:
Comparison
Principal Agent
Amounts recognized as income Gross of related expenditures and Net of amounts paid to other
costs entities
Timing of recognition of income During the period of actual During the period of distribution of
redemption points
Rebates, Discounts, Coupons and
Free Products
Illustration - Rebates
On January 1, 2023, Altair Company started to offer its customers a rebate coupon for every P700 single-receipt sales. Each
coupon entitles the holder P50 off in its future purchase and has a two-year validity. During the year, Altair Company received
P9,550,000 from its customers and distributed 10,000 rebate coupons. The Company expects that only 90% of these coupons will
be used before they lapse. During 2023, the customers have used 6,300 of these coupons.

The entry
stand-alone
to record
selling
the price
allocation
of theisrebate
as follows:
coupons are computed as follows:
Cash/Accounts
Discount provided
Receivable
per point P9,550,000
P 50.00
Multiply
SalesbyRevenue
expected rate of usage by customer 90% P9,120,000
Stand-alone
Contractselling
Liability
price
– points
of a point P 45.00 429,750
Multiply by Number of points distributed 10,000
Estimated stand-alone selling price of points P450,000

The
The transaction pricethe
entry to record shall be allocated
recognition as follows:
of income from points:
Sold Goods: Contract Liability – rebate coupons 300,825
Sales Revenue 300,825

Points:
Illustration – Free Products
To promote its new line of milk tea blend, Taro Magic, Viray Company offered a promotional campaign wherein the customers
can have a free cup for every cumulative purchase of five cups. This is monitored through a voucher given to the customers
where a stamp is punched for every cup purchased. Each cup of Taro Magic has a selling price of P120. For the year 2022, 50,000
cups were sold and 80% of the stamps distributed are expected to be redeemed.

In
Thethis case,
entry toeach stamp
record will result istoasa follows:
the allocation discount of P24. The stand-alone selling price can now be computed as follows:
Cash/Accounts Receivable P6,000,000
Discount
Salesprovided
Revenueper point P 24.00 P5,172,414
Multiply by expected
Contract Liabilityrate of usage by customer
– stamps 80% 827,586
Stand-alone selling price of a point P 19.20
Multiply by Number of points distributed 50,000
Estimated stand-alone selling price of points P960,000
The
The transaction pricethe
entry to record shall be allocated
recognition as follows:
of income from points:
Sold Goods: Contract Liability – stamps 662,069
Sales Revenue 662,069

Points:
Gift Certificates
Accounting for Gift Certificates
Generally, gift certificates are accounted for as follows:
1. The proceeds shall initially recognized as unearned income
2. Generally, the related income shall be recognized only upon the
transfer of goods or the provision of the services
3. In case of breakage, the portion of the initial proceeds received
that is not expected to be used by customers shall be attributed
to breakage.
4. The amounts attributed to breakage shall be recognized as
income in proportion to the pattern of rights exercised by
customers.
Illustration
At the beginning of 2023, Mejia Company reported a P650,000 balance in its unearned income from gift certificates. During the
year, a total balance of P1,900,000 was received from selling gift certificates, and P1,630,000 of these were used by customers in
buying the Company’s products. It is estimated that all of the gift certificates issued will be used by the customers
Upon receipt of the amounts from the customers, the following journal entry will be made:
Cash P1,900,000
Unearned income – GC P1,900,000

Upon the actual usage of the customers, the following journal entry shall be made:
Unearned income – GC P1,630,000
Sales revenue P1,630,000
Illustration
Rico Company sold a total of P4,000,000 gift certificates during 2023. Based on the Company’s estimate, 4% of the face amount
of these gift certificates will never be used by the customers due to the loss of the certificates. For the whole year, P2,304,000 gift
certificates were used.
Initially, the amount that should be attributed to breakage is P160,000 with the P3,840,000 attributed to the total amount off gift
certificates expected to be used. The journal entry to record the sale of gift certificates is as follows:

Cash P4,000,000
Unearned income – GC P4,000,000

The entry to record the customer’s use of GCs during 2023:

Unearned income – GC P2,304,000
Sales revenue P2,304,000

The entry to record the recognition of corresponding income from breakage:

Unearned income – GC 96,000
Income from breakage 96,000
Sales with Right of Return
Sales with Right of Return
Normally, customers may return the products it purchased from the
entity due to a variety of reasons. In these cases, the following
accounting procedures shall be followed for sales with right of return:
1. Revenue shall be recognized only to the extent of the estimated
amount that will not be refunded to the customers or that will
not be returned by the customers. Proforma journal entry:

Cash/Accounts Receivable xx
Sales Revenue xx
Refund Liability xx
Sales with Right of Return
2. The portion that is estimated to be refunded or to be returned shall
be reorganized as refund liability. Changes in this estimate shall be
recognized as either an addition or deduction from the revenue
during the period of change.

Subsequently, this refund liability shall be debited whenever there

is an actual refund to customers or returns from customers.
Sales with Right of Return
3. An asset is recognized which represents the entity’s right to recover
its product from customers related to the settlement of the refund
liability. This amount shall be based on the estimated number of
products that the customers will return.

This asset is measured at the product’s manufacturing costs less

expected costs to recover those products, including potential
decreases in the value of the returned products.
Sales with Right of Return
The recognition of the asset above has a decreasing effect in the
amount of the entity’s cost of goods sold. Proforma journal to record
the recognition of the asset is as follows:

Asset for expected return xx

Cost of goods sold xx
Illustration
During the year 2023, Femur Company, a book publisher, sold 10,000 copies of a novel. The company allows the customer to
return the book provided these are still salable and in pristine condition. In addition, the company will also the transportation
costs for the returned books which average P30/book. Manufacturing costs and selling price amounted to P200/book and
P450/book, respectively. The Company reasonably expects that 2% of the books will be returned by the customers. The company
uses the perpetual inventory system for the recording of its book inventories.

In this case, the journal entries to initially record the receipts from customers and the cost of goods sold are the following:
Cash P4,500,000
Sales Revenue P4,410,000
Refund Liability 90,000

Cost of Goods Sold P2,000,000

Inventory P2,000,000
The amount of asset to be recognized from the expected recovery from customers’ return shall be determined as follows:
Manufacturing cost per unit P200
Less: Cost per unit to recover the returned products 30
Recovery asset per unit P170
Multiply by: Expected no. of books to be returned 200
Total recovery asset to be recognized P34,000

The entry to record this amount shall be:

Assets for expected return xx
Cost of goods sold xx