Problem
Prescriptions Depot Ltd. (PDL) is a national chain of drug stores, some company owned and some operated as franchises. The company reported $5.4 billion in revenue in the most recent fiscal year, and net earnings of $295 million. Gross profit was in the range of 20% but is different for various product lines. Some products are essentially grocery items, and gross margin is minimal. Other products sell with a 30%-40% profit margin. Prescription drugs also generate a range of profit margins, but industry averages are 15%-25% gross margin. Company reporting objectives are focused around increasing earnings. PDL realizes, though, that many market analysts carefully look for trends in sales growth, particularly year-over-year same-store sales growth. The company is not public but wishes to comply with IFRS, since medium-term plans include a public offering.
You are a new analyst in the company's performance reporting department. You have been asked to review accounting policy for several issues.
PDL accepts vendor "cents off" coupons, which involve small discounts to the retail price of a given product. PDL records the sale to the customer at the net cash received. PDL remits the coupons to the vendor and reduces the amount otherwise owing to the vendor and the cost of inventory by the coupon amount. For example, assume that PDL has accepted 5,000, $1 coupons for shampoo. Sale of the shampoo has a retail value of $25,000, but PDL reports the sale at the $20,000 amount of cash collected from the customer ($25,000 less the $5,000 in coupons). If PDL owes the vendor $98,000, PDL then pays only $93,000, and PDL records $93,000 as the cost of the product.
PDL has also issued certain coupons for cash refunds, a cash payment directly to the end consumer from PDL and not through a vendor arrangement. For example, in one promotion, any customer who purchased $500 of home health care merchandise on a given weekend would, after filing the appropriate form and receipts, receive a $35 cash refund. A six-week period is provided for the documents to be filed, and then the offer expires. The volume of these refunds has been low, but PDL may be more active with these promotions in the future. The refund was recorded as a reduction to cash and a reduction to sales, when the refund was issued.
The company has a loyalty points program, wherein customers with membership cards earn five loyalty points for every dollar spent in the store. Higher points per dollar are assigned to prescription drug sales. Once points accumulate, customers can redeem the points at various levels/values for full or partial payment on merchandise purchases. At various times, sales incentives are offered, such as "double points" awarded to large one-time purchases. At other times, to trigger redemption, redeemed points are given bonus values. Some points are never redeemed, but the collection and redemption levels are healthy, and PDL is convinced that customer loyalty is significantly enhanced by the program.
When points are granted in conjunction with a sale transaction, the sale is recorded for the full amount of the sale. An estimate of the cost of goods to be obtained through point redemption is recorded at the same time. For example, a sale of $100 is recorded, along with its $75 cost of goods sold. Points are issued that are expected to be redeemed for goods with a retail price of $4 and a cost of $3. Accordingly, a $3 expense and liability is recorded at the same time as the sale. When points are redeemed, inventory is reduced, at its $3 cost, and the liability is reduced. The overall liability balance is carefully reviewed each quarter, and adjusted up or down for shifts in cost expectations, redemption levels, and changes to the percentages redeemed under "bonus" conditions.
PDL rents many of its premises, under three- to five-year lease contracts. Typically, the lessor undertakes renovations for PDL to make the premises suitable for occupancy as a retail drugstore. However, PDL itself installs a behind-the-counter set-up in the pharmacy area. This includes an area for secure drug storage, drug disposal, "sharps" (needle) disposal, and secure data transmission and storage devices. These are all designed to meet legislative or industry standards, and the set-up is built to exacting standards to ensure drug safety and patient confidentiality. PDL is then responsible for the removal of this set-up when and if it vacates at the end of a lease term.
Task
Prepare case report outlining all accounting/financial reporting issues.