Classifying Considerations Given by a Vendor to a Customer

Where Do They Belong on the Income Statement?

Brian H. Marshall, CPA

Companies often provide cash payments and other forms of consideration to their customers for a variety of reasons. The income statement classification of this consideration by both vendors and customers has traditionally been subject to significant judgment, because relevant guidance was absent from U.S. GAAP. Vendors may classify the consideration provided as either a cost (or expense) or a revenue reduction, depending on the circumstances, when recognized in the income statement. Customers may classify the consideration received as a reduction of cost of sales (or the specific cost incurred) or as revenue, depending on the circumstances, when recognized in the income statement. This classification issue has been particularly important to public companies that emphasize total revenue (as opposed to net income or net loss) in press releases and management's discussion and analysis sections of SEC filings. In response to the lack of specificity in the accounting literature in this area, the Emerging Issues Task Force (EITF) has issued guidance over the past few years that addresses the income statement classification, timing of recognition, and measurement of the consideration in various scenarios. This article focuses specifically on the income statement classification by a vendor for consideration provided to a customer (EITF 01-9). See Exhibit 1 and the Sidebar for relevant definitions and related guidance.