Entities recognize the amount of consideration received or receivable that is

Entities recognize the amount of consideration

This preview shows page 12 - 14 out of 28 pages.

Entities recognize the amount of consideration received or receivable that is expected to be returned as a refund liability, representing their obligation to return the customer’s consideration. Entities also recognize a return asset (and adjust cost of sales) for the right to recover the goods returned by the customer. They initially measure this asset at the former carrying amount of the inventory, less any expected costs to recover the goods, including potential decreases in value of the goods expected to be returned. At each reporting date, they remeasure the refund liability and update the measurement of the asset recorded for any revisions to the expected level of returns, as well as any additional decreases in the value of the products expected to be returned. The standard requires the carrying value of the return asset to be presented separately from inventory and subject to impairment testing on its own, separately from inventory on hand. The standard also requires the refund liability to be presented separately from the corresponding asset (i.e., on a gross basis rather than a net basis). “Like-kind exchanges” (i.e., exchanges by customers of one product for another of the same type, quality, condition and price) are not considered returns for the purposes of applying the standard. Generally, these exchanges are nonmonetary transactions within the scope of ASC 845, Nonmonetary Transactions . Further, the standard states that contracts in which a customer may return a defective product in exchange for a functioning product should be evaluated in accordance with the guidance on warranties included in the standard. Example 22 in the standard 18 illustrates how to account for a right of return. How we see it While the standard’s accounting treatment for rights of return may not significantly change practice under legacy GAAP, there are some notable differences. The changes in this area (i.e., primarily treating the right of return as a type of variable consideration that must be accounted for using the variable consideration guidance, including the application of the constraint) may affect retail and consumer products entities. Entities have to assess whether their models for estimating returns are appropriate, given the need to consider the constraint and methods to estimate variable consideration (i.e., the expected value or the most likely amount method).
Image of page 12
EY AccountingLink | ey.com/us/accountinglink 13 | Technical Line How the new revenue standard affects retail and consumer products entities Separately presenting the right of return asset and refund liability on the balance sheet is also a change in practice from legacy GAAP for many retail and consumer products entities. Under legacy GAAP, the carrying value associated with any product expected to be returned typically remained in inventory and was not subject to separate impairment testing (although when the value of returned product was expected to be zero, inventory was fully expensed at the time of sale).
Image of page 13
Image of page 14

You've reached the end of your free preview.

Want to read all 28 pages?

  • Fall '17
  • meenakshi

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors