How to recognize Revenue for e-commerce.
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Nazmus Sakib
- Posts: 3
- Joined: 07 May 2024, 17:22
How to recognize Revenue for e-commerce.
ABC PLC is an e-commerce-based company. A customer orders a product on Cash on delivery 500$ and 5$ Delivery Charge, XYZ Company a logistics company who have a contract with ABC, will deliver products to consumers of ABC PLC. How will ABC Book revenue as per IFRS 15?
Re: How to recognize Revenue for e-commerce.
Who's holding the stock? Does ABC operate in the same way as an agent or as a principal?
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Nazmus Sakib
- Posts: 3
- Joined: 07 May 2024, 17:22
Re: How to recognize Revenue for e-commerce.
ABC holding stock but after order In website, delivery person of XYZ company take product from stock and deliver to the consumer.
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Ketan Marwah
- Trusted Expert
- Posts: 337
- Joined: 16 Feb 2023, 18:10
- Location: Germany
Re: How to recognize Revenue for e-commerce.
Hi,
The answer to your question might get a bit lengthy but hoping that a careful reading of the response might assist you. Most of the E-Commerce entities around the globe work on a “marketplace” model, which means they provide a technology powered virtual shopping mall where sellers and buyers can transact in return of a fixed % commission on sale. Before we come to how you would record revenue, let's first be clear whether ABC control's the stock (& not merely "hold").
If we carefully analyze the “IFRS 15 Basis for Conclusions, IASB explained that in order for an entity to conclude that it is providing the good or service to the customer, it must first control that good or service. That is, the entity cannot provide the good or service to a customer if the entity does not first control it. If an entity controls the good or service, the entity is a principal in the transaction. If an entity does not control the good or service before it is transferred to the customer, the entity is an agent in the transaction. [IFRS 15.B36, BC385D].
As per IFRS 15.B34A, in order to determine the nature of its promise (as a principal or an agent), the entity must
(a) identify the specified goods or services to be provided to the customer; and
(b) assess whether it controls each specified good or service before that good or service is transferred to the customer”.
So would would have to evaluate the business model and challenge the substance over form of the existing arrangement to ascertain whether ABC has control over the ordered good or not.
Below factors can be useful while performing any such determination.
- Physical Control through Fulfillment Centers – Most E-Com players these days use large fulfilment centers to store inventory and have fair idea of estimated supplies. This model helps E-com entities to:
a) Ensure the right quality is shipped to the end customers. Various pre-delivery quality checks ensure that the best quality product is shipped, and returns are controlled.
b) Obtain physical control the goods before they are actually shipped. In today’s era, the logistic technologies ensure that the E-com entities can control and ship the ‘exact’ unit out of lakhs stored in warehouses.
c) Product insurance guarantee given to the suppliers ensure that in case of any breakage/mishap, the E-Com entity will ensure full compensation to seller.
Therefore, the substance over form only suggest that the real ‘control’ of the product before it is sold to the end customer, is with the E-Com entity.
- Price Controls – This is not a known secret that e-commerce entities, though largely called “marketplace”, do have more than a fair share in controlling prices of goods sold to end customers. This is done largely through:
a) Advance procurement arrangements with manufactures / resellers. You may be surprised to know that most items in fashion industry are procured atleast one year in advance at 40% of MRP on consignment basis. This gives a whopping 60% margin to E-Com entities to increase/decrease price. Do you understand how these entities manage the fancy sales 4 times a year?
b) Instant Bank discounts which are partially and sometimes fully funded by E-Com entities
c) Deep discounting is a common term that we have been hearing when someone questions the business model of these E-Com entities. Deep discounting is nothing but a strategic business decision which helps these entities do for market penetration, customer behavior molding and often clear off ageing inventory at loss rather than later incurring cost of scrapping them at a meagre 10%-20% MRP.
These pricing techniques help E-Com entities to control the overall sale of every product and every unit that they sell. For example, a lower discount on an iPhone 12 on Website A can make it unmarketable as an end customer may find it cheaper on Website B, vice versa this may also result in making a similar product, say Samsung S21, more marketable due to overall price proposition.
Accordingly, through price decisions, an E-Com entity effectively ‘controls’ “what to sell”, “when to sell” and also “what not to sell”.
Once you are clear on whether ABC has "control" or not thereafter it is mentioned under IFRS 15.B35-B36 that a principal recognizes revenue and expenses in gross amounts, whereas an agent merely recognizes fees or commissions, irrespective of whether gross cash flows pass through the agent.
The answer to your question might get a bit lengthy but hoping that a careful reading of the response might assist you. Most of the E-Commerce entities around the globe work on a “marketplace” model, which means they provide a technology powered virtual shopping mall where sellers and buyers can transact in return of a fixed % commission on sale. Before we come to how you would record revenue, let's first be clear whether ABC control's the stock (& not merely "hold").
If we carefully analyze the “IFRS 15 Basis for Conclusions, IASB explained that in order for an entity to conclude that it is providing the good or service to the customer, it must first control that good or service. That is, the entity cannot provide the good or service to a customer if the entity does not first control it. If an entity controls the good or service, the entity is a principal in the transaction. If an entity does not control the good or service before it is transferred to the customer, the entity is an agent in the transaction. [IFRS 15.B36, BC385D].
As per IFRS 15.B34A, in order to determine the nature of its promise (as a principal or an agent), the entity must
(a) identify the specified goods or services to be provided to the customer; and
(b) assess whether it controls each specified good or service before that good or service is transferred to the customer”.
So would would have to evaluate the business model and challenge the substance over form of the existing arrangement to ascertain whether ABC has control over the ordered good or not.
Below factors can be useful while performing any such determination.
- Physical Control through Fulfillment Centers – Most E-Com players these days use large fulfilment centers to store inventory and have fair idea of estimated supplies. This model helps E-com entities to:
a) Ensure the right quality is shipped to the end customers. Various pre-delivery quality checks ensure that the best quality product is shipped, and returns are controlled.
b) Obtain physical control the goods before they are actually shipped. In today’s era, the logistic technologies ensure that the E-com entities can control and ship the ‘exact’ unit out of lakhs stored in warehouses.
c) Product insurance guarantee given to the suppliers ensure that in case of any breakage/mishap, the E-Com entity will ensure full compensation to seller.
Therefore, the substance over form only suggest that the real ‘control’ of the product before it is sold to the end customer, is with the E-Com entity.
- Price Controls – This is not a known secret that e-commerce entities, though largely called “marketplace”, do have more than a fair share in controlling prices of goods sold to end customers. This is done largely through:
a) Advance procurement arrangements with manufactures / resellers. You may be surprised to know that most items in fashion industry are procured atleast one year in advance at 40% of MRP on consignment basis. This gives a whopping 60% margin to E-Com entities to increase/decrease price. Do you understand how these entities manage the fancy sales 4 times a year?
b) Instant Bank discounts which are partially and sometimes fully funded by E-Com entities
c) Deep discounting is a common term that we have been hearing when someone questions the business model of these E-Com entities. Deep discounting is nothing but a strategic business decision which helps these entities do for market penetration, customer behavior molding and often clear off ageing inventory at loss rather than later incurring cost of scrapping them at a meagre 10%-20% MRP.
These pricing techniques help E-Com entities to control the overall sale of every product and every unit that they sell. For example, a lower discount on an iPhone 12 on Website A can make it unmarketable as an end customer may find it cheaper on Website B, vice versa this may also result in making a similar product, say Samsung S21, more marketable due to overall price proposition.
Accordingly, through price decisions, an E-Com entity effectively ‘controls’ “what to sell”, “when to sell” and also “what not to sell”.
Once you are clear on whether ABC has "control" or not thereafter it is mentioned under IFRS 15.B35-B36 that a principal recognizes revenue and expenses in gross amounts, whereas an agent merely recognizes fees or commissions, irrespective of whether gross cash flows pass through the agent.
Senior Compliance & Reporting Manager
Ocean & Logistics Reporting & Accounting
Maersk Group
Ocean & Logistics Reporting & Accounting
Maersk Group
Re: How to recognize Revenue for e-commerce.
If ABC operates as a marketplace and also handles delivery similar to Amazon's FBA model, they might only recognise gross revenue for the delivery service plus the commission on the sale price. Could you provide more details about ABC's business model, Nazmus?
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Nazmus Sakib
- Posts: 3
- Joined: 07 May 2024, 17:22
Re: How to recognize Revenue for e-commerce.
ABC is an e-commerce platform for beauty products, uses a "platform-to-business" (P2B) model by partnering with a delivery company. ABC manages the online store and customer experience, while XYZ (the logistics company) handles deliveries.