Runway Discount (Runway), a privately held online retailer, has implemented a new customer referral marketing campaign. The campaign involves incentivizing current customers to refer their friends to Runway’s website. When a current customer refers someone who makes a purchase on Runway’s website, the referring customer receives a $25 credit to be applied to a future purchase. Two important provisions should be highlighted regarding this “Refer-a-Friend” program:
The $25 credit is contingent upon the existing customer’s referral actually making a purchase The $25 credit is applied to the referring customer’s future purchase at the time that the referred customer makes a purchase
The business purpose of this Refer-a-Friend program is to increase sales and expand Runway’s customer base by providing incentives for current customers to refer their friends.
The first accounting issue associated with Runway Discount’s Refer-a-Friend program is identifying how the $25 referral credit should be recorded in Runway’s income statement. Is this consideration an adjustment of the selling prices of the vendor’s products or services, and therefore characterized as a reduction of revenue, or is it a cost incurred by the vendor for assets and services received from the customer, and therefore characterized as a cost or expense? The next significant accounting issue is regarding when Runway should record the $25 referral credit as a liability: (a) at the time an existing customer receives the $25 referral credit, or (b) at the time the existing customer actually uses the $25
referral credit to make a purchase?
In the following sections, we will discuss the possible accounting treatments under U.S GAAP and IFRS, which relate to these accounting issues facing Runway Discount. Relevant examples will be provided of businesses that offer similar referral incentive programs. We will conclude with our recommendation of how Runway Discount should account for the referral credits it issues relating to its Refer-a-Friend program.
Applicable Authoritative Literature
FASB Accounting Standards Codification (ASC) 605-50, Revenue Recognition IASC International Accounting Standards (IAS) 18, Revenue Recognition
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