Case 13-1 Refer-a-Friend Program Background: Runway Company which is an on–line retailer sells high-end fashion. This company offers existing customers a $25 credit if the Existing Customer refers a friend as a new customer to Runway’s Web site and the New Customer purchases merchandise from Runway. After a purchase is made by the New Customer, the Existing Customer receives a $25 credit to be applied to a future purchase. “That presumption is overcome and the consideration should be characterized as a cost incurred if, and to the extent that, both of the following conditions are met: a. The vendor receives, or will receive, an identifiable benefit (goods or services) in exchange for the consideration. In order to meet this condition, the identified benefit must be sufficiently separable from the recipient’s purchase of the vendor’s products such that the vendor could have entered into an exchange transaction with a party other than a purchaser of its products or services in order to receive that benefit. b. The vendor can reasonably estimate the fair value of the benefit identified under the preceding condition. If the amount of consideration paid by the vendor exceeds the estimated fair value of the benefit received, that excess amount shall be characterized as a reduction of revenue when recognized in the vendor’s income statement (ASC-605-50-45-2)”. The company does receive the “identified benefit”, because the company got a new customer and the new customer made the first order successfully, “reasonably estimate the fair value of the benefit” company provide the $25 Referral credit based on fair value of cost Runway would pay to acquire a new customer from an unrelated third party or marketing firm.
The consideration should be characterized as a cost incurred if the fact meet both “receive an identifiable benefit” and “reasonably