Last Updated on 03/02/2020 by 75385885

IFRS 15 Revenue from Contracts with Customers

IFRS 15 Right of return

Part of the main section Measurement – Determining the transaction price – Constraining estimates of variable consideration IFRS 15 Constraining estimates

Examples 22–25 illustrate the requirements in paragraphs 56–58 of IFRS 15 on constraining estimates of variable consideration. In addition, the following requirements are illustrated in these examples:

1. paragraph 55 of IFRS 15 on refund liabilities (Example 22); and
2. paragraphs B20–B27 of IFRS 15 on sales with a right of return (Example 22).

Example 22—Right of return

IE110 An entity enters into 100 contracts with customers. Each contract includes the sale of one product for CU100 (100 total products × CU100 = CU10,000 total consideration). Cash is received when control of a product transfers. The entity’s customary business practice is to allow a customer to return any unused product within 30 days and receive a full refund. The entity’s cost of each product is CU60.

IE111 The entity applies the requirements in IFRS 15 to the portfolio of 100 contracts because it reasonably expects that, in accordance with paragraph 4, the effects on the financial statements from applying these requirements to the portfolio would not differ materially from applying the requirements to the individual contracts within the portfolio.

IE112 Because the contract allows a customer to return the products, the consideration received from the customer is variable. To estimate the variable consideration to which the entity will be entitled, the entity decides to use the expected value method (see paragraph 53(a) of IFRS 15) because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled. Using the expected value method, the entity estimates that 97 products will not be returned.

IE113 The entity also considers the requirements in paragraphs 56–58 of IFRS 15 on constraining estimates of variable consideration to determine whether the estimated amount of variable consideration of CU9,700 (CU100 × 97 products not expected to be returned) can be included in the transaction price. The entity considers the factors in paragraph 57 of IFRS 15 and determines that although the returns are outside the entity’s influence, it has significant experience in estimating returns for this product and customer class. In addition, the uncertainty will be resolved within a short time frame (ie the 30-day return period). Thus, the entity concludes that it is highly probable that a significant reversal in the cumulative amount of revenue recognised (ie CU9,700) will not occur as the uncertainty is resolved (ie over the return period).

IE114 The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can be resold at a profit.

IE115 Upon transfer of control of the 100 products, the entity does not recognise revenue for the three products that it expects to be returned. Consequently, in accordance with paragraphs 55 and B21 of IFRS 15, the entity recognises the following:

1. revenue of CU9,700 (CU100 × 97 products not expected to be returned);
2. a refund liability of CU300 (CU100 refund × 3 products expected to be returned); and
3. an asset of CU180 (CU60 × 3 products for its right to recover products from customers on settling the refund liability).

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