Canada [Help] Revenue Recognition - RETURNS


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Hello, I'm confused about something and I hope it's okay to ask for some more help.

I always learned that a contra account to make up net sales is: sales returns and allowances.
I've used this account for any returns.

On my textbook, it's not saying I should use an account that either predicts how many units will be returned or if an estimation isn't reasonable, that I can't recognize revenue until the return policy date is over.

These accounts are:
return liability (which a percentage is taken away from revenue)

or

Rights recovery asset (which a percentage is taken away from COGS)

If there are no reasonable estimates it tells me to replace revenue and cogs all together.
 
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kirby

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I can't discern your question. Can you state it explicitly, please?
 
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I can't discern your question. Can you state it explicitly, please?
Thank you for the reply kirby!

I would like to develop a better understanding of these return accounts. Upon further research I see that Exhibit B entails some sort of "contract", but why is it more complicated than Exhibit A, and produces the same results?

Exhibit A:
Upon Purchase:
Dr. Accounts Receivable
Cr. Sales Revenue

Dr. COGS
Cr. Inventory

When a return occurs:
Dr. Sale Return and Allowances
Cr. Accounts Receivable

Dr. Inventory
Cr. COGS

Exhibit B:
Upon Purchase:
Dr. Accounts Receivable
Cr. Refund Liability

Dr. Right to Recovery Asset
Cr. Inventory

Return policy period expires and performance obligation has been satisfied:
Dr. Return Liability
Cr. A/R (for the amount that was refunded)
Cr. Sales Revenue (for the rest of the amount)

Dr. COGS (for the rest of the amount)
Dr. Inventory (for the amount refunded)
Cr. Right to Recovery Asset
 

kirby

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Method B would make sense to be used if your company experienced a very high return rate, like over 50% of all sales were returned. Otherwise Method A is the standard.
 
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Hi, under IFRS 15 you should estimate the volume of expected returns based on past experience (e.g. 1% of sales) and only for those products recognise a refund liability instead of revenue, and a recovery asset instead of COGS. See paragraphs B21-B25 of IFRS 15 and let us know if you have further questions. Do you report under IFRS or US GAAP?
 

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