EITF 01-09: Accounting for Vendor Consideration to Customers

The Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) created guidance to address varied accounting for payments from vendors to customers. Before the issuance of EITF Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer,” there was no uniform method for these transactions. Companies were inconsistent in recording arrangements like rebates, slotting fees, and cooperative advertising, making it difficult for investors to compare company performance.

EITF 01-09 addressed whether these payments should be classified as a business expense or as a direct reduction of the vendor’s revenue. The guidance applied to any consideration a vendor provided along the distribution chain, including payments to indirect customers. The task force’s work aimed to create a consistent framework and curb practices that could artificially inflate reported revenues.

The Presumption of Revenue Reduction

EITF 01-09 established a principle that any cash consideration from a vendor to a customer is presumed to be a reduction of the selling price of the vendor’s products or services. Consequently, this payment should be treated as a reduction of revenue. This presumption is based on the rationale that such payments are price adjustments inseparable from the primary revenue-generating transaction. The guidance views these payments as incentives that lower the total price the customer pays.

This default treatment applies to a wide array of business practices. For example, volume-based rebates, where a customer receives cash back after purchasing a certain quantity, are treated as revenue reductions. Cash discounts for prompt payment also fall under this presumption, as do slotting fees, which are payments to retailers to secure shelf space.

Unless specific conditions are met, these payments cannot be classified as a marketing or selling expense. This approach prevents companies from overstating their gross revenue by recording the full sales price and then separately booking the customer payment as an operating expense. This practice could mislead investors about the true top-line performance of the business.

The presumption is “rebuttable,” meaning a company can overcome it by meeting specific criteria. The burden of proof lies with the vendor to demonstrate that the payment was for something other than a price reduction. Without this proof, the guidance mandates that the consideration reduces the revenue recognized from that customer.

The Identifiable Benefit Exception

The guidance in EITF 01-09 allows for an exception to the rule of revenue reduction under specific circumstances. The presumption can be overcome if the vendor receives an identifiable benefit in return for the payment, and this benefit is distinct from the revenue transaction. To qualify for this exception and classify the payment as a cost, two conditions must be met.

First, the vendor must receive an identifiable good or service in exchange for the consideration. The benefit received must be something the vendor could have purchased from a party other than the customer. The benefit must be sufficiently separable from the customer’s act of purchasing the vendor’s products and be a distinct deliverable.

Second, the vendor must be able to reasonably estimate the fair value of the good or service received. If the fair value cannot be reliably estimated, the entire payment must be treated as a reduction of revenue, even if a benefit was received. This condition ensures that the amount classified as an expense reflects the true economic value of what the vendor obtained.

An example of this exception is cooperative advertising. If a manufacturer pays a retail customer to feature the manufacturer’s product in a local newspaper advertisement, the advertisement is a distinct service. The manufacturer could have purchased this advertising space from the newspaper directly. If the manufacturer can determine the fair value of that advertisement, the payment can be classified as an advertising expense.

Measurement and Financial Statement Application

Once a vendor determines it has received an identifiable benefit that meets the exception criteria, it must be measured correctly for financial reporting. The amount of the payment that can be classified as an expense is limited to the fair value of the benefit received. Fair value is the price that would be paid for the same or similar goods or services in a standalone transaction with a third party.

If the consideration paid by the vendor exceeds the fair value of the benefit received from the customer, the accounting treatment is split. The portion of the payment equal to the fair value of the benefit is recorded as an operating expense. The excess amount—the portion of the payment greater than the fair value—must be characterized as a reduction of revenue.

The timing of when to recognize the revenue reduction or expense is also important. The reduction or expense should be recognized when the related revenue is recognized. For example, if a vendor offers a rebate based on annual purchases, the vendor should estimate and accrue the expected rebate amount as a reduction of revenue throughout the year as sales are made to that customer.

On the income statement, any amount determined to be a reduction of revenue is deducted from gross revenues to arrive at net revenues. This directly impacts the reported top-line sales number. The portion of a payment that qualifies as an expense is reported below the gross profit line, within the operating expenses section.

Current Status Under ASC 606

The principles established in EITF 01-09 have been formally superseded and incorporated into the revenue recognition standard, ASC 606, “Revenue from Contracts with Customers.” This became effective for most public companies after December 15, 2017. Although EITF 01-09 is no longer a standalone rule, its core logic remains a part of U.S. Generally Accepted Accounting Principles (U.S. GAAP).

ASC 606 addresses this topic under “Consideration Payable to a Customer.” The standard maintains the same principle: consideration paid to a customer is treated as a reduction of the transaction price, and therefore revenue. This is required unless the payment is in exchange for a “distinct good or service” that the customer transfers to the vendor. The term “distinct good or service” is conceptually similar to the “identifiable benefit” criterion.

The application under ASC 606 is largely consistent with the legacy guidance. The framework still requires a vendor to determine if it is receiving something of value from the customer that is separate from the customer’s purchase. If the vendor receives a distinct good or service and can determine its fair value, the payment is accounted for as a purchase from a supplier. If the payment exceeds the fair value, the excess is treated as a reduction of revenue.