A retailer sells products to customers with a 30-day full-refund return right. Based on extensive historical experience, the retailer estimates that 8% of units sold in a batch will be returned. Under IFRS 15's guidance on rights of return, how should the retailer account for this batch of sales at the point of sale?
- Recognize revenue for the consideration it expects to be entitled to after excluding the estimated returns, recognize a refund liability for the amount expected to be refunded, and recognize an asset (with a corresponding adjustment to cost of sales) for its right to recover the returned products
- Recognize revenue for 100% of the sales price with no adjustment for expected returns, because a right of return is a post-sale service obligation that IFRS 15 accounts for entirely separately from revenue
- Defer all revenue recognition on the entire batch of sales until the 30-day return window has fully expired for every unit sold
- Recognize revenue net of the full historical return rate for every unit sold, but recognize no separate refund liability, since IFRS 15 treats revenue as already stated net once an estimate is applied
Why A? And why not the others?
Correct answer: A. Recognize revenue for the consideration it expects to be entitled to after excluding the estimated returns, recognize a refund liability for the amount expected to be refunded, and recognize an asset (with a corresponding adjustment to cost of sales) for its right to recover the returned products
IFRS 15 paragraphs B20-B22 require a seller with a right-of-return obligation to recognize revenue only for the consideration it expects to be entitled to after excluding expected returns (treating the return right as a form of variable consideration subject to the constraint), to recognize a refund liability for the amount it expects to refund, and to recognize an asset (with a corresponding adjustment to cost of sales) representing its right to recover the products expected to be returned. The option recognizing the full sales price with no return adjustment is wrong because a right of return is not a separate service obligation under IFRS 15 — it directly affects how much transaction price the entity is entitled to keep. The option deferring all revenue until the window closes is far more conservative than the standard requires; IFRS 15 permits recognizing revenue immediately once expected returns can be reasonably estimated, which the retailer's extensive historical data supports. The option that nets the return rate into revenue but omits a refund liability is wrong because the model requires the refund obligation and the asset for recovered products to be recognized separately from the net revenue figure, not folded away once an estimate is applied.
Source: IFRS 15 Revenue from Contracts with Customers, paragraphs B20-B22 (rights of return)