Sale with a right of return in IFRS 15

Sale with a right of return in IFRS 15

Under IFRS 15 Revenue from contract with customers, when an entity makes a sale with a right of return it recognises revenue at the amount to which it expects to be entitled by applying the variable consideration and constraint guidance set out in Step 3 of the model (see Step 3 Determine the transaction price). The entity also recognises a refund liability and an asset for any goods or services that it expects to be returned.

  • An entity applies the accounting guidance for a sale with a right of return when a customer has a right to:
    a full or partial refund of any consideration paid;
  • a credit that can be applied against amounts owed, or that will be owed, to the entity; or
  • another product in exchange (unless it is another product of the same type, quality, condition and price – e.g. exchanging a red sweater for a white sweater). [IFRS 15.B20]

An entity does not account for its stand-ready obligation to accept returns as a performance obligation. [IFRS 15.B21–B22]

In addition to product returns, the guidance also applies to services that are provided subject to a refund.Sale with a right of return

The guidance does not apply to:

  • exchanges by customers of one product for another of the same type, quality, condition and price; and
  • returns of faulty goods or replacements, which are instead evaluated under the guidance on warranties. [IFRS 15.B26–B27]

When an entity makes a sale with a right of return, it initially recognises the following: [IFRS 15.B21, B23, B25]

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Licensing of intellectual property

Licensing of intellectual property – in summary

The standard provides application guidance for the recognition of revenue attributable to a distinct licence of intellectual property (IP).

The general model is that if the licence is distinct from the other goods or services, then an entity assesses the nature of the licence to determine whether to recognise revenue allocated to the licence at a point in time or over time and to estimate variable consideration.

But with complex topics like licensing of intellectual property, there is also guidance separate from the general model for estimating variable consideration, on the recognition of sales- or usage-based royalties on licences of IP when the licence is the sole or predominant item to which the royalty relates.

What is intellectual property?

One could say almost everything could be intellectual property! Licensing of intellectual property

Here is a description (not a definition!) from the WIPO (World Intellectual Property Organisation):

Intellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.

IP is in general protected in law by, for example, patents, copyright and trademarks, which enable people to earn recognition or financial benefit from what they invent or create. A difficult balance exists between striking the interests of innovators and the wider public interest, businesses operating in IP have to foster an environment in which creativity and innovation can flourish.

Just take a look at the (public) discussion between open source software (Apache OpenOffice) and licensed software (Microsoft Office365).

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Contract Modifications under IFRS 15

Contract Modifications under IFRS 15 – Just two practical examples, to better understand all kind of things for IFRS 15.

On 1 January 20X1, Wireless Company enters into a two-year contract with a customer for a 2-gigabyte (GB) data plan with unlimited talk and text for CU60/month and a subsidised handset for which the customer pays CU200. Contract Modifications under IFRS 15

The handset has a stand-alone selling price of CU600. Contract Modifications under IFRS 15

For purposes of this illustration, the time value of money has not been considered, the stand-alone selling price of the wireless plan is assumed to be the same as the contractual price and the effect of the constraint on variable consideration is not considered. … Read more

Contract modifications and variable consideration 1 best 2 complete

Contract modifications and variable consideration are sometimes not easy to distinguish from one another. So here is a discussion bringing them together.

IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. See a summary of IFRS 15 here. Contract modifications and variable consideration

Contract modifications

A contract modification arises when the parties approve a change … Read more

Step 3 Determining Transaction Price

Step 3 Determining Transaction Price is all about correct revenue accounting in respect of the transaction price for the contract as part of IFRS 15 Revenue from contracts with customers. Step 3 Determining Transaction Price

IFRS 15 The revenue recognition standard provides a single comprehensive standard that applies to nearly all industries and has changed revenue recognition quite significant. Step 3 Determining Transaction Price

IFRS 15 introduced a five step process for recognising revenue, as follows:Step 3 Determining Transaction Price

  1. Identify the contract with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price for the contract
  4. Allocate the transaction price to each specific performance obligation
  5. Recognise the revenue when the entity satisfies each performance obligation

 


Step 3, determining the … Read more

Step 4 Allocate the transaction price

Step 4 Allocate the transaction price to each specific performance obligation is the fourth step in the process required by IFRS 14 Revenue from contracts with customers in order to properly recognise revenue.

IFRS 15 The revenue recognition standard provides a single comprehensive standard that applies to nearly all industries and has changed revenue recognition quite significant.

IFRS 15 introduced a five step process for recognising revenue, as follows:Step 4 Allocate the transaction price

  1. Identify the contract with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price for the contract
  4. Allocate the transaction price to each specific performance obligation
  5. Recognise the revenue when the entity satisfies each performance obligation

After determining the transaction price in Step 3, companies in step 4 … Read more

Technology reseller arrangements

Technology reseller arrangements

IFRS 15 also changed practice for entities that sell their products through distributors or resellers (collectively referred to in this section as resellers). It is common in the technology industry for entities to provide resellers with greater rights than end-customers. For example, an entity may provide a reseller with price protection and extended rights of return.

Under IFRS 15, entities will need to first evaluate when control of the product transfers to the end-customer. To do this, first, entities may need to assess whether their contracts with resellers are consignment arrangements, under which control likely would not transfer until delivery to the end-customer (see Consignment arrangements). The standard provides three indicators that an arrangement is a … Read more

Dealer sales vehicle incentives

Dealer sales vehicle incentives – Some automotive entities (including automotive parts suppliers (APSs) and original equipment manufacturers (original equipment manufacturers (OEM)s)) needed to change certain revenue recognition practices as a result of applying the revenue recognition standard, IFRS 15 Revenue from Contracts with Customers.  These standards superseded virtually all previous revenue recognition requirements in IFRS and US GAAP. Original equipment manufacturers need to use significant judgement when they identify separate performance obligations (i.e., units of account), which may be different from those identified under IAS 18.

original equipment manufacturers (OEM)s frequently offer sales incentives in contracts to sell vehicles to dealers. These sales incentives may include cash rebates, bonuses or other types of incentives made available to Read more