TO: xxxxx
FROM: xxxxxx
DATE: xxxxxx
SUBJECT: TrueBlood Case 1, Refer-a-Friend

Background

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