Right of return: how much revenue to book while returns are open
A retailer ships 100 identical products at £100 each, collects £10,000 and reaches the month end with the return window still open. Recording £10,000 of revenue and waiting for returns to arrive is the wrong order under UK-adopted IFRS 15. Once control has passed, revenue covers only the consideration the retailer expects to be entitled to. If 5 returns are expected, that is £9,500 of revenue, a £500 refund liability and a separate £300 asset for the right to recover the goods. The figures are hypothetical.
Check that control has passed
This accounting starts only after control of the goods has transferred to the customer. An advance received before transfer is a different question. So is delivery to a distributor on consignment, where control may not have passed and no revenue arises yet (IFRS 15 paragraphs B77 to B78). This is the UK-adopted IFRS position, not FRS 102 or US GAAP.
For goods sold with a right of return, paragraphs B20 to B23 require three things: revenue for the consideration the entity expects to be entitled to, which excludes the products expected back; a refund liability; and an asset for the right to recover products from customers. Expected returns are variable consideration, so the constraint in paragraphs 56 to 58 still applies to the revenue figure. An exchange for another product of the same type, quality, condition and price is not a return for this purpose, and replacing a defective item is assessed under the warranty guidance (paragraphs B26 to B27).
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The entries
In this hypothetical, 100 identical products are sold at £100 each and cost £60 each. Control has passed, customers have paid £10,000 and 5 returns are expected. There is no VAT, discount or financing, no expected recovery cost or damage at first, and £9,500 of revenue meets the constraint. The 5% return rate is invented for the example; IFRS 15 sets no standard rate.
Dr cash £10,000; Cr revenue £9,500; Cr refund liability £500.
Dr cost of sales £5,700; Dr right to recover goods £300; Cr inventory £6,000.
The £300 asset is not stock on the shelf, because the goods are still with customers. Nor does it reduce the £500 owed to customers who return their products. Paragraph B25 requires the asset to be presented separately from the refund liability, so the balance sheet shows £300 and £500, never a net £200.
| Item | Calculation | Amount |
|---|---|---|
| Cash | 100 × £100 | £10,000 |
| Revenue | 95 × £100 | £9,500 |
| Refund liability | 5 × £100 | £500 |
| Right to recover goods | 5 × £60 | £300 |
| Cost of sales | 100 × £60 less £300 | £5,700 |
| Gross profit | £9,500 less £5,700 | £3,800 |
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When returned goods will be worth less
Paragraph B25 measures the asset at the former carrying amount of the products less expected costs to recover them, including potential decreases in their value. Suppose instead that the 5 expected returns will cost £20 in total to collect and lose £30 in total in value.
The asset becomes £300 less £20 less £30 = £250, and the second entry becomes: Dr cost of sales £5,750; Dr right to recover goods £250; Cr inventory £6,000. Gross profit falls to £3,750.
The refund liability stays at £500 if customers' refund entitlement has not changed. Expected wear on returned goods lowers the asset. It does not, by itself, give the retailer a right to refund less; that depends on the contract and consumer law, not on these entries. Nothing here is VAT advice either.
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At each close
Paragraphs B24 and B25 require the expected returns, the refund liability and the asset to be updated at the end of each reporting period. Our suggestion: group sales by return window so every cohort still open at the period end is visible, keep the evidence behind the expected return count, estimate recovery costs and the condition of goods that come back, compare returns received after the close with the estimate, and have the revenue owner approve each re-estimate. Begin with a list of the sales whose return window is still open on the last day of the period.
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