Sale with a right of return

Learning objectives

• Calculate revenue (excluding products expected to be returned), the refund liability and the asset for the right to recover products (former carrying amount less expected costs to recover them and any decreases in value).L2, L3
• Record a sale with a right of return.L2, L3

Normative references

• IFRS 15 §B20In some contracts, the entity transfers control of a product while granting the customer the right to return it (for example, because of dissatisfaction) and receive a full or partial refund, a credit that can be applied against amounts owed, another product, or a combination of these.
• IFRS 15 §B21The entity recognises: revenue in the amount of consideration to which it expects to be entitled (and therefore excluding products expected to be returned); a refund liability; and an asset, with a corresponding adjustment to cost of sales, for its right to recover the products.
• IFRS 15 §B22The promise to stand ready to accept a returned product during the return period is not a separate performance obligation in addition to the obligation to provide a refund.
• IFRS 15 §B23To determine the expected consideration (excluding products expected to be returned), the entity applies the requirements for determining the transaction price, including the constraint on estimates of variable consideration. No revenue is recognised for products expected to be returned; a refund liability is recognised for those amounts.
• IFRS 15 §B24At the end of each reporting period, the entity updates its estimate of expected returns, adjusts the refund liability accordingly and recognises the adjustment as revenue (or a reduction of revenue).
• IFRS 15 §B25The asset for the right to recover products is measured by reference to the former carrying amount of the products (for example, inventory) less any expected costs to recover them, including potential decreases in value; it is updated at each reporting date and presented separately from the refund liability.
• IFRS 15 §B26Exchanges of one product for another of the same type, quality, condition and price (for example, another colour or size) are not accounted for as returns.
• IFRS 15A right to return a defective product in exchange for a functioning product is accounted for in accordance with the guidance on warranties (B28 to B33), not the guidance on rights of return.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

18 questions

• Albane sells 1,000 lamps for cash at 50 each, i.e. {cash_received}, with a 30-day right of return for a refund. Based on its experience, it expects to refund {expected_refunds}, an estimate judged consistent with the constraint (case data). Record the sale entry, excluding the derecognition of inventory and the cost of sales, which are recorded in a separate entry not requested here.L2
• Tessier sells cameras with a right of return. For its December 20X1 sales, it recognised a refund liability of {initial_liability}. At the reporting date of 31 December 20X1, in the light of observed return trends (no refund has yet been paid), it reduces its estimate of expected refunds to {revised_refunds}. Record the entry adjusting the refund liability; the corresponding adjustment to the asset for the right to recover products is recorded in a separate entry not requested here.L3
• Ombrelle sells lamps with a 30-day right of return. It recognises revenue for the full invoiced price and recognises an expense for a provision covering the expected returns. This treatment complies with IFRS 15.L2
• At each reporting date, Pervenche updates its estimate of the expected returns on its shoe sales; the resulting adjustment to the refund liability is recognised as revenue or as a reduction of revenue.L2
• Calisse sells 500 coffee makers with a 60-day right of return and expects some of them to be returned. What does it recognise when control of the coffee makers is transferred to the customers?L2
• Which of the following statements about sales with a right of return are correct?L3
• On 15 June 20X1, Vélinor sells {units} scooters for cash at a unit price of {unit_price}. Customers have a 30-day right of return with a full refund. Based on its history, Vélinor estimates that {return_rate} of the scooters will be returned; according to the case data, it is highly probable that this estimate will not result in a significant reversal of the revenue recognised. Calculate the revenue and the refund liability to be recognised at the date of sale.L2
• In March 20X2, the online retailer Marelia ships {units} jackets sold at {unit_price} each and paid on ordering. Customers may send the jackets back within 14 days for a refund. Using the previous season's statistics, customer service forecasts that {expected_returns} jackets will be returned; management considers, based on the case data, that this forecast meets the constraint on variable consideration. What amounts of revenue and refund liability does Marelia recognise on delivery?L3
• In December 20X1, Ardélie sells 1,000 kitchen robots at a unit price of {unit_price}, with a 90-day right of return. At the date of sale, it expects {initial_expected_returns} robots to be returned and recognises the corresponding refund liability. At 31 December 20X1, the reporting date, {returned_units} robots have been returned and refunded; Ardélie revises its estimate and now expects only {revised_remaining_returns} further robots to be returned. Calculate the refund liability at the reporting date and the adjustment to revenue (the asset for the right to recover the products is not dealt with here).L3
• In October 20X2, the board game publisher Lumbra delivers {units} game boxes to shops at a unit price of {unit_price}; the shops may return unsold boxes until 31 March 20X3 for a refund. On delivery, Lumbra estimated returns at {initial_rate} of the boxes. At 31 December 20X2, the reporting date, no box has yet been returned, but as in-store sales are disappointing, Lumbra raises its estimate to {revised_rate}. Calculate the refund liability at the reporting date and the reduction in revenue to be recognised.L3
• On 1 September 20X1, Tissange sells {units} duvets for cash at a unit price of {unit_price}, with a 30-day right of return. The unit cost of the duvets in inventory is {unit_cost}. Tissange expects {expected_returns} duvets to be returned, an estimate which, according to the case data, meets the constraint on variable consideration. The asset for the right to recover the products is measured, according to the case data, at {return_asset}. Record the entries for the sale.L2
• On 20 April 20X2, the garden products wholesaler Brindal delivers {units} watering cans to a garden centre, invoiced at {unit_price} each and payable in 60 days; the garden centre may return the cans within 45 days in exchange for a credit. The cans were held in inventory at a unit cost of {unit_cost}. Brindal forecasts that {expected_returns} cans will be returned (an estimate consistent with the constraint on variable consideration according to the case data) and measures the asset for the right to recover the products at {return_asset}, an amount given by the case. Record the delivery.L3
• When reviewing the 20X1 financial statements of Solvane, which sells cosmetics with a 60-day right of return, you note that December sales of 80,000 were recognised in full as revenue and that a provision of 4,000 was recognised as an expense for the expected returns. Returned products are put back on sale. What correction do you propose?L3
• Caldera sells drills with a right of return. For the quarter's sales, it correctly excluded expected returns from revenue and recognised a refund liability of 9,000. However, it removed all the drills delivered from inventory, at a carrying amount of 150,000, and charged them to cost of sales. According to the case data, the asset for the right to recover the drills expected to be returned amounts to 6,000. What correction is needed?L3
• Sorbelle had recognised a refund liability of 15,000 for the expected returns on its November 20X1 sales. At 31 December 20X1, the reporting date, no return has occurred and Sorbelle revises its estimate: the liability required is now only 9,000. How does it account for the difference?L3
• Bruyère sells hiking backpacks with a 60-day right of return. Its management controller proposes to treat the promise to stand ready to take back the backpacks during those 60 days as a separate performance obligation, to which part of the transaction price would be allocated. This analysis complies with IFRS 15.L2
• Altimètre sells tents with a right of return. At the date of sale, it estimates (case data) that {units_expected_returned} tents will be returned. The carrying amount of each tent in inventory before the sale was EUR {unit_carrying_amount}. Altimètre expects to incur recovery costs of EUR {expected_recovery_costs} in total to take back those tents and estimates that each returned tent will lose EUR {value_decrease_per_unit} of value to it. Calculate the amount of the asset for the right to recover the products.L2
• The online shop Mailles Fines sells {units_sold} sweaters at EUR {unit_price} each; each sweater was carried in inventory at EUR {unit_cost}. Customers may send a sweater back for a refund, or exchange it for the same model in another size, at the same price and in the same condition. Based on its history (case data, returns constrained in accordance with the variable consideration requirements), Mailles Fines expects {units_sent_back} sweaters to be sent back, of which {units_exchanged} for a mere size exchange. For each refunded sweater, it expects a recovery cost of EUR {recovery_cost_per_unit} and a total decrease in value of EUR {total_value_decrease} across all the refunded sweaters (costs relating to exchanges are ignored for this exercise — teaching assumption). Calculate revenue, the refund liability and the asset for the right to recover the products.L3