Question

Please identify the accounting issues and how these items should be handled for the following case

In August 2013, HLJ initiated a new promotional program called “Engagement Embarrassment Insurance” (EEI) intended for individuals who purchase surprise diamond engagement rings for their prospective partners. If the marriage proposal is not accepted (or for any other reason within three months of purchase), HLJ will repurchase the ring from the customer. HLJ will refund the original sales price of the diamond portion of the ring (on average $2,000) but will not provide a refund for the gold component of the ring (which averages $1,000) as HLJ considers the ring’s band and setting to be custom-made for the customer, whereas each diamond has a grading certificate to ensure its individual features. The average cost of gold is $600, and $1,200 for diamond. Since beginning the EEI program, the company has had, on average, 60 customers in the potential repurchase period at any point in time. Total number of rings sold under this program in fiscal 2014 is expected to be 240.

Answer 1

As per IFRS 115 revenue should be recognized when it is probable that recovery of the amount from the contract is established. In the given question HLJ should book revenue arisen on gold part should be booked immediately and the amount on diamond sale should be booked when the possibility to incurre the amount established.