QUESTION 24 Illustration 24–Right of return An entity enters into 1,000 contracts with customers. Each contract includes the sale of one product for $ 50 (1,000 total products × $ 50 = $ 50,000 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 $ 30. The entity applies the requirements in IFRS 15 to the portfolio of 1,000 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. Since 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 970 products will not be returned. 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. Determine the amount of revenue, refund liability and the asset to be recognized by the entity for the said contracts.

Solution

Let's analyze the information given and calculate the necessary amounts.

  1. Revenue:
  2. The entity expects to be entitled to the consideration from 970 products that it estimates will not be returned. Thus, the entity would recognize revenue for those 970 products at the time of sale.
  3. Revenue = Number of Products * Price per Product
  4. Revenue = 970 * $50 = $48,500
  5. Refund Liability:
  6. The entity would also recognize a refund liability for the products it expects to be returned.
  7. Refund Liability = Number of Products Expected to be Returned * Price per Product
  8. Refund Liability = (1000 - 970) * $50 = $1,500
  9. Asset:
  10. The entity would also recognize an asset (inventory right) for its right to recover products from customers upon settling the refund liability. Since the entity expects that returned products can be resold at a profit and the cost to recover the products is immaterial, the asset would be measured based on the former carrying amount of the product less any expected costs to recover those products.
  11. Asset = Number of Products Expected to be Returned * Cost per Product
  12. Asset = (1000 - 970) * $30 = $900

Therefore, the entity would recognize $48,500 as revenue, $1,500 as refund liability, and $900 as an asset for its right to recover products for these contracts.


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