Refer-a-Friend Program

Case 13-1

Refer-a-Friend Program

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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. The terms of the program are as

follows:

Runway offers existing customers (the “Existing Customer”) a $25 credit (the

“$25 Referral Credit”) if the Existing Customer refers a friend (the “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 from Runway.

The $25 Referral Credit represents the fair value of the cost Runway would pay to

acquire a new customer from an unrelated third party or marketing firm who is not a

purchaser of its products. The program is open to all of Runway’s customers and does not

need to be combined with any initial or existing purchases.

Required:

1. How should the $25 Referral Credit be recorded in Runway’s Income Statement

— as a reduction of revenue or as a marketing expense?

2. When would Runway record the $25 Referral Credit?

What are the entries Runway would record when the $25 Referral Credit is earned

by the Existing Customer?

What are the entries Runway would record when the $25 Referral Credit is

redeemed against a $100 purchase made by the Existing Customer?

3. Runway is planning to adopt IFRSs in the near future. What is the relevant

accounting guidance they would follow under IFRSs?

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