Question

Please use the FASB Codification to answer:

(a)   What is the authoritative literature addressing revenue recognition when right of return exists?

(b)   What is meant by “right of return”? “Bill and hold”?

(c)   Describe the accounting when there is a right of return.

(d)   When goods are sold on a bill-and-hold basis, what conditions must be met to recognize revenue upon receipt of the order? 

Answer 1

a. If there is right of return given to customer on sale of product, revenues are to be recognised only when all conditions pertaining thereto make a sale are met. (Accounting Standards Codification section 605-15-25-1)

b. Right of return means the Buyer has the power to return the product to the seller under certain circumstances which include if customer is not happy with the product .

Bill and hold is where the seller has billed the goods in the name of the seller however hold the physical possession until the same is transferred in future point of time (Accounting Standards Codification 605-15-05-3)

c. Accounting when there is a right of return include:

• Revenues generated from the transferred products with the sum that the company is entitled to receive.
• .A liability in case of any refund
• An asset viz, a right to recover good back from customer in case of refund
• Cost of sales when the entry for asset recoverable is made.

(Accounting Standards Codification 606-10-55-23)

d.In order to recognize revenue when goods are sold on a bill-and-hold basis,the entity should satisfy if the customer has obtained the control of the product.

• Purpose behind the 'Bill and Hold' should be clear, relevant and significant.
• The product held under 'bill and hold' must not be mixed up with inventories
• The product must be connected and dispatched to the location of customer within a reasonable time.
• The entity has no right to sell that product to any other customer.

If these conditions are fulfilled, then the revenues can be recognized.