Financial Reporting · Revenue

IFRS 15 Warranties, Rights of Return and Licences for ACCA Financial Reporting

Updated 11 October 2026 · Fact-checked

These are specific IFRS 15 situations where you apply the five-step model with extra rules. Decide whether control has passed, then split out separate performance obligations such as service warranties, loyalty points or licences. Recognise revenue when or as each performance obligation is satisfied, that is, when or as control transfers, and defer the rest as a contract liability.

Understand Specific Transactions: Warranties, Rights of Return and Licences

IFRS 15 uses one model for all contracts: identify the contract, identify performance obligations, set the price, allocate it, and recognise revenue when each obligation is satisfied. The specific transactions in this topic are just common cases where the answer depends on control, not on legal title or delivery alone.

Right of return. If customers can return goods, you cannot recognise revenue for goods you expect to be returned. You estimate returns, recognise revenue only for the goods expected to be kept, and set up a refund liability for the rest. You also recognise an asset (right to recover goods) at the former carrying amount of the goods expected back, less any recovery costs, and reduce cost of sales by the same amount.

Warranties. An assurance-type warranty only promises the product meets agreed specification. It is accounted for under IAS 37 as a provision. A service-type warranty gives an extra service beyond that, or can be bought separately. It is a separate performance obligation. You allocate part of the price to it and recognise that revenue over the warranty period.

Consignment, and repurchase agreements. On consignment, goods go to a dealer but the seller keeps control until the dealer sells them or the seller's right to recall ends. So the seller recognises no revenue on delivery to the dealer. In a repurchase agreement, if the seller must or can be made to buy the asset back, the customer has not really gained control. For a forward or call option, the repurchase price decides the treatment:

If the repurchase price is below the original selling price, it is a lease (unless the contract is part of a sale and leaseback, when it is a financing arrangement).
If the repurchase price is at or above the original selling price, it is a financing arrangement.

For a put option, first ask whether the customer has a significant economic incentive to exercise it. If it does, compare the repurchase price with the original selling price and with the expected market value of the asset:

If the repurchase price is below the original selling price, it is a lease (unless the contract is part of a sale and leaseback, when it is a financing arrangement).
If the repurchase price is at or above the original selling price and is more than the expected market value of the asset, it is a financing arrangement.
If the repurchase price is at or above the original selling price and is not more than the expected market value of the asset, treat it as a sale with a right of return.

If the customer does not have a significant economic incentive to exercise the put option, treat the arrangement as a sale with a right of return.

Loyalty points and licences. Points that give a material right (a discount the customer would not otherwise get) are a separate performance obligation. You allocate part of the sale price to the points and defer it until they are redeemed or expire. A licence of intellectual property is either a right to access (revenue over time) or a right to use (revenue at a point in time when the customer can use it). Ask whether the licensor's ongoing activities significantly affect the IP the customer uses.

Key rules to remember

Revenue with right of return: Revenue = price × units expected NOT to be returned; The units expected back go to a refund liability, not revenue.
Refund liability: Refund liability = price × units expected to be returned; Reassess the estimate at each reporting date.
Right-to-recover asset: Asset = cost × units expected to be returned (less recovery costs); Credit cost of sales for the same amount.
Allocation by relative stand-alone selling price: Allocated amount = total price × SSP of item ÷ total of all SSPs; Use for service warranties, loyalty points and bundles.
Loyalty points stand-alone selling price: SSP of points = points expected to be redeemed × value per point; Use expected redemption, not points issued.
Revenue on redemption of points: Revenue = amount allocated × points redeemed to date ÷ total points expected to be redeemed; Deduct revenue already recognised in earlier years.
Assurance warranty: Dr Warranty expense, Cr Provision (IAS 37); No separate revenue is deferred.

How to solve Specific Transactions: Warranties, Rights of Return and Licences questions

Work through the same sequence for any question on specific transactions.

1Identify the transaction type: return right, warranty, consignment, repurchase, loyalty points or licence.
2Ask who has control at the reporting date. Look for the right to recall goods, repurchase options and who bears risk.
3Identify separate performance obligations, such as a service warranty, material-right points or a licence.
4Work out the stand-alone selling prices and allocate the transaction price in proportion.
5Decide timing: point in time (control transfers) or over time (service period, redemption, access licence).
6Post the double entry, including any refund liability, contract liability or provision.
7State the amounts for revenue and for liabilities at the year end, and show your workings.

Quickest way: Control test and defer the rest

When to use it: Use in Section A and B objective questions where you need an answer in about three minutes.

Ask: has control passed? If not, revenue is nil and the goods stay in inventory.
If there is a separate service or points, split the price by relative selling prices.
Recognise only the portion earned. Defer the rest as a contract liability or refund liability.
Check the arithmetic against the options and remove any answer that recognises full revenue early.

Common mistakes in Specific Transactions: Warranties, Rights of Return and Licences

Recognising full revenue when goods can be returned.
Students focus on delivery and ignore the expected returns.
Fix: Revenue is only for goods expected to be kept. Credit the rest to a refund liability.
Treating every warranty as a separate performance obligation.
Students see the word warranty and allocate price automatically.
Fix: Only service-type warranties are separate. Assurance-type warranties go to an IAS 37 provision.
Recognising revenue on consigned goods when delivered to the dealer.
Students confuse physical delivery with transfer of control.
Fix: Keep goods in the seller's inventory until the dealer sells them or control passes.
Treating a repurchase agreement as a sale.
Legal title moves, so it looks like a sale.
Fix: If the seller must or can be forced to buy back, treat it as a financing arrangement or lease depending on the repurchase price.
Allocating loyalty points using points issued instead of points expected to be redeemed.
The question gives both numbers and students use the first.
Fix: Use expected redemption for the stand-alone selling price and for the redemption proportion.
Recognising all licence revenue at signing.
Students ignore the access versus use distinction.
Fix: Right to access means over time. Right to use means at the point the customer can use and benefit from the IP.

Worked examples

Example 1

Delta sells 1,000 units at ₹5,000 each (cost ₹3,000 each) with a right of return. Delta estimates 100 units will be returned. Show the revenue, refund liability and cost of sales for the sale.

Show the solution

Total cash or receivable = 1,000 × ₹5,000 = ₹50,00,000.
Units expected to be kept = 900. Revenue = 900 × ₹5,000 = ₹45,00,000.
Refund liability = 100 × ₹5,000 = ₹5,00,000.
Cost of sales = 900 × ₹3,000 = ₹27,00,000.
Right-to-recover asset = 100 × ₹3,000 = ₹3,00,000 (assume no recovery costs).
Total cost = 1,000 × ₹3,000 = ₹30,00,000, which equals ₹27,00,000 + ₹3,00,000.

Answer: Revenue ₹45,00,000; refund liability ₹5,00,000; cost of sales ₹27,00,000; right-to-recover asset ₹3,00,000.

Example 2

On 1 January, Omega sells a machine for ₹10,00,000 and delivers it the same day. The price includes a two-year service-type warranty that starts on 1 January, on delivery. The machine's stand-alone selling price is ₹9,00,000 and the two-year warranty is ₹1,00,000 if sold separately. Find the warranty revenue for the year ended 31 December of the sale year.

Show the solution

Total SSP = ₹9,00,000 + ₹1,00,000 = ₹10,00,000, equal to the price, so there is no discount to spread.
Warranty allocation = ₹1,00,000. Machine revenue = ₹9,00,000, recognised at delivery.
The warranty covers 24 months starting on 1 January, and revenue is recognised evenly over that period.
Revenue in the first year = ₹1,00,000 × 12 ÷ 24 = ₹50,000.
Contract liability at 31 December = ₹1,00,000 − ₹50,000 = ₹50,000.

Answer: Warranty revenue is ₹50,000 in the first year, with ₹50,000 deferred as a contract liability.

Example 3

A retailer runs a loyalty scheme. A customer earns 500 points on a ₹5,000 sale. Each point is worth ₹1 on redemption, and the retailer expects 80% of points to be redeemed. Find the amount allocated to the points and the revenue recognised on the goods at the date of sale. Round to the nearest rupee.

Show the solution

SSP of points = 500 × 80% × ₹1 = ₹400.
SSP of goods = ₹5,000. Total SSP = ₹5,400.
Allocated to points = ₹5,000 × 400 ÷ 5,400 = ₹370.37, which rounds to ₹370.
Revenue on the goods now = ₹5,000 − ₹370.37 = ₹4,629.63, which rounds to ₹4,630. This agrees with ₹5,000 − ₹370 = ₹4,630.

Answer: ₹370 is deferred for the points; ₹4,630 is recognised on the sale (figures rounded to the nearest rupee).

Exam tips

Underline words like 'recall', 'buy back', 'dealer' and 'separately priced'. They signal the control decision.
In objective tests, always compute revenue on expected, not issued, quantities.
For Section C, lay out each entry with debit and credit, and state your reasoning in one sentence per item.
Say whether a warranty is assurance or service type. The marker looks for that classification.
Always calculate the deferred balance at the year end as well as the revenue recognised.

Practice questions from Revenue

Specific Transactions: Warranties, Rights of Return and Licences: frequently asked questions

How do you account for a right of return under IFRS 15?

Recognise revenue only for goods you expect to keep. Record a refund liability for the price of goods expected back. Recognise an asset for the cost of those goods and reduce cost of sales accordingly.

What is the difference between an assurance and a service warranty?

An assurance warranty only confirms the product works as specified, so you record an IAS 37 provision. A service warranty gives an extra service or is sold separately, so it is a separate performance obligation with deferred revenue.

When is revenue recognised on consignment inventory?

The seller recognises revenue when the dealer sells the goods to a third party, or when control otherwise passes. Until then, the goods remain in the seller's inventory.

How are loyalty points accounted for under IFRS 15?

Points that give a material right are a separate performance obligation. You allocate part of the sale price to them based on expected redemption and recognise it as revenue when points are redeemed or expire.