CA Varun Sethi IndAS 115 - Revenue from contracts with customers - sale or return

Revenue from Contracts with Customers

IndAS 115 Revenue from Contracts with Customers

CA Varun

Sethi 09899766487

Presentation by : CA Varun Sethi 1

Practical application issues: Sale with a right of return

2015 2 Presentation by : CA Varun Sethi

1. Revenue should NOT be

recognized for goods

expected to be returned,

and a liability should be

recognized for expected

refunds to customers.

2. An asset & corresponding

adjustment to cost of sales

should be recognized for

the right to recover goods

from customers on settling

the refund liability.

1.Revenue is typically

recognized at the gross

amount (in full) with a

provision recorded against

revenue for the expected

level of returns, provided

that the seller can reliably

estimate the level of returns

based on an established

historical record and other

relevant evidence

2.Current IAS 18 does not

specify the balance sheet

accounting for expected

returns.

1. Revenue is recognized at

the time of sale.(price is fixed

or determinable, buyer is

obligated to pay, etc.).

2. If future returns can be

reasonably estimated.

3. Returns are estimated

based on historical

experience with an

allowance recorded against

sales.

4. Revenue is Not recognized

until the return right lapses

if an entity is unable to

estimate potential returns.

ASC 605 - US GAAP

(Pre ASC 606) IAS 18 IFRS 15

IndAS 115 Revenue from contracts with customers

CA Varun

Sethi 09899766487

Sale with a

right of return


1. The accounting for product returns under the revenue standard will be

largely unchanged from current guidance under U.S. GAAP and IFRS.

2. There might be some retail and consumer entities that are deferring

revenue today because they are unable to reliably estimate returns.

3. Companies will use a probability-weighted or most likely outcome approach,

whichever is most predictive, to determine the likelihood of a sales return

under the new standard. Consideration received is included in revenue to

the extent that it is probable (highly probable) that there will be no significant

reversal when the uncertainty is resolved. This could result in revenue being

recognized earlier than under today's guidance.

4. A right of return affects the transaction price and accordingly NOT adjusted

through a provision for sales return


CA Varun

Sethi 09899766487

Sale with a

right of return

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CA Varun

Sethi 09899766487

Sale with a

right of return

1. There is diversity in existing practice in the balance sheet presentation of

expected returns (No guidance under IAS 18/ Pre ASC 605).

2. The New revenue standard (IFRS 15/IndAS 115) specifies that the balance

sheet should reflect both the refund obligation and the asset for the right to

the returned goods on a GROSS basis.

Bala

nce s

heet

imp

act

Separate

reporting

of refund

obligation

Separate

reporting

of asset

from

inventory

GROSS

reporting

of asset &

refund

obligation

1. Under today’s (Pre IFRS 15/IndAS 15) guidance, the carrying value

associated with any product expected to be returned typically remains in

inventory.

2. But the new guidance requires the asset to be recorded separately from

inventory to provide greater transparency.


IndAS 115 (Para 55, B20-27)

Revenue from contracts with customers

CA Varun

Sethi 09899766487

Sale with a

right of return

Revenue

for the

transferre

d products

A refund liability (B23, Para 55)

Para B21:

Revenue for the transferred products

in the amount of consideration to

which the entity expects to be

entitled (therefore, revenue would

NOT be recognized for the products

expected to be returned)

(requirements in para 47–72)

1

Para 55, B23

1. An entity shall recognize a refund

liability if the entity receives

consideration from a customer and

expects to REFUND some or all of

that consideration to the customer.

2. A refund liability is measured at the

amount of consideration received

(or receivable) for which the entity

does not expect to be entitled

2

*Assuming other a/c entries (incl. opening entries)

for consumption/ COGS/ stocks have been already

passed.

**Assuming $1 is the cost of the products

transferred on sale or return basis of which selling

price is $10.

1. Dr. Revenue $ 10

2. Cr. Refund liabilities $ 10 (Assuming 10% refund rate historically)

3. Dr. Asset ** $ 1

4. Cr. Cost of sales $ 1 (Asset recognized since CONTROL NOT transferred)

* At the time

of book

closure for

Yearly/ Qtrly/

monthly

reporting

1. Dr. Debtors $ 100

2. Cr. Revenue $ 100

A/c entries:

At the time of

invoicing/

dispatch

Report

ing p

eriod I


IndAS 115 (Para 55, B20-27)


CA Varun

Sethi 09899766487

Sale with a

right of return

1. Dr. Refund liabilities $ 10

2. Cr. Revenue $ 5

Cr. Debtors $ 5

3. Dr. Asset (separate from inventory) $ 0.5

4. Cr. Cost of sales $ 0.5

Case B (assuming NO

additional sale

to the dealer

since the last

reporting period


2. Cr. Revenue $ 5

3. Dr. Asset (separate from inventory) $ 0.5 (since half the refund liability is released to revenue)


Case A* (assuming NO

additional sale

to the dealer

since the last

reporting period

Report

ing p

eriod I

I

Update

measurem

ent of the

asset

Initial measurement of the asset

Para B21:

At the end of each reporting period, an

entity shall update the measurement

of the asset arising from changes in

expectations about products to be

returned.

3

&

4

Refer reporting period I: Entry 3/4

Para B25

An asset recognized for an entity’s

right to recover products from a

customer on settling a refund liability

shall initially be measured by

reference to the former carrying

amount of the product (for example,

inventory) less any expected costs to

recover those products (including

potential decreases in the value to the

entity of returned products)

A

*Case A: Assuming the right of sale or return is continuous.

** Case B: Assuming the right of sale or return has expired during the reporting period and goods were returned.

Update

measureme

nt of the

refund

liability

Para 55, B24

1. An entity shall update the measurement of the refund liability at the end of each

reporting period for changes in expectations about the amount of refunds. An entity

shall recognize corresponding adjustments as revenue (or reductions of revenue).

1


IndAS 115 Vs AS 9/ IAS 18


CA Varun

Sethi 09899766487

Sale with a

right of return

1. Dr. Revenue $ 10

2. Cr. Refund liabilities $ 10 (Assuming 10% refund rate historically)

3. Dr. Asset **(separate from inventory) $ 1

4. Cr. Cost of sales $ 1 (Asset recognized since CONTROL not transferred)

* At the time

of book

closure for

Yearly/ Qtrly/

monthly

reporting



A/c entries:

At the time of

invoicing/

dispatch

Report

ing p

eriod I

1. Dr. P&L $ 10

2. Cr. Provision for sales returns $ 10 (Assuming 10% refund rate historically)

3. Dr. Inventory $ 1

4. Cr. Cost of sales $ 1



AS 9 (India GAAP) / IAS 18 (IFRS) IndAS 115 (India GAAP) / IFRS 15

1. Revenue is recognized at the same

amt as under IFRS 15 but using a

provision rather than as

adjustment to the transaction price.

2. A suitable provision (per IAS

37/Para 36) for returns based on

previous experience is made.

AS 9/ IAS 18

Vs

IndAS 115

1. Revenue is recognized at amount

which the entity is entitled to.

2. A refund liability is recognized for

amounts refundable.

3. An asset/inventory is recognized at

cost less expenses separately from

Inventory and refund liability


IndAS 115 Vs AS 9/ IAS 18


CA Varun

Sethi 09899766487

Sale with a

right of return


2. Cr. Revenue $ 5

3. Dr. Asset (separate from inventory) $ 0.5 (since half the refund liability is released to revenue)


Case A* (assuming NO

additional sale

to the dealer

since the last

reporting

period

Report

ing

period I

I 1. Nil entry

2. Neither recognition nor update of

1. Revenue entitlement

2. Refund liabilities

3. Asset (re-measurement)


2. Cr. Revenue $ 5

Cr. Debtors $ 5

3. Dr. Asset (separate from inventory) $ 0.5


Case B (assuming NO

additional sale

to the dealer

since the last

reporting period

1. Dr. Sales return $ 5

Cr. Debtors $ 5

3. Dr. Inventory $ 0.5


AS 9 (India GAAP) / IAS 18 (IFRS) IndAS 115 (India GAAP) / IFRS 15

No update of

1. Revenue entitlement

2. Refund liabilities

3. Asset (re-measurement)

AS 9/ IAS 18

Vs

IndAS 115

1. Refund liability Is updated/ adjusted

from revenue to update amount

which the entity is entitled to.

2. An asset/inventory measurement is

updated arising from changes in

expectations about products to be

returned.

CA Varun Sethi IndAS 115 - Revenue from contracts with customers - sale or return

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Transcript of CA Varun Sethi IndAS 115 - Revenue from contracts with customers - sale or return