Case 13-01 Refer-a-Friend Program
“Runway Discount (“Runway” or the “Company”) is a privately held online retailer that sells discounted high-end fashion. In an effort to increase its sales and customer base, Runway implemented a customer referral marketing campaign (the “Refer-a-Friend Program”) whereby existing customers can refer friends to Runway and receive a $25 credit towards the purchase of future merchandise”(Deloitte.com, n.d.). Runway offers a $25 gift card to the customers who refer a friend. The gift card is being sent when the new referred friend makes first purchase.
The $25 Referral Credit is recorded in Runway’s Income Statement — as a marketing expense. According to FASB Accounting Standard Codification, 605-50-45-1,“A vendor may give a customer a sales incentive or other consideration addresses the circumstances under which that consideration is either:
• a. An adjustment of the selling prices of the vendor’s products or services and therefore characterized as a reduction of revenue when recognized in the vendor’s income statement
• b. A cost incurred by the vendor for assets or services received from the customer and therefore characterized as a cost or expense when recognized in the vendor’s income statement” FASB Accounting Standards Codification. (n.d.).
Also, According to FASB Accounting Standard Codification, 605- 50-25-3“For a sales incentive offered voluntarily by a vendor and without charge to customers that can be used or that becomes exercisable by a customer as a result of a single exchange transaction, and that will not result in a loss on the sale of a product or service, a vendor shall recognize the cost of such a sales incentive at the later of the following:
• a. The date at which the related revenue is recognized by the vendor
• b. The date at which the sales incentive is offered. FASB Accounting Standards