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Corporate Financial Reporting · Revenue from Contracts with Customers (Ind AS 115)

Ind AS 115 Specific Applications: Return, Warranty, Licence, Repurchase

Updated 11 October 2026 · Fact-checked

These are the application-guidance rules in Appendix B of Ind AS 115 that tell you how to apply the five-step model to special arrangements: sale with right of return, warranties, bill-and-hold, repurchase, consignment, licences and customer options. Identify the arrangement, then apply its specific test before recognising revenue.

Understand Specific Applications: Licensing, Warranties, Repurchase and Others

The five-step model of Ind AS 115 works for most contracts. Some arrangements have features that make the answer to "has control passed?" or "what is the performance obligation?" unclear. Appendix B gives specific guidance for these. It covers performance obligations over time, measuring progress, right of return, warranties, principal versus agent, customer options, unexercised rights, non-refundable upfront fees, licensing, repurchase agreements, consignment, bill-and-hold, customer acceptance and disaggregated revenue.

Sale with a right of return. If a customer can return goods, you do not recognise revenue for the goods you expect to be returned. You recognise three things: revenue for the amount you expect to be entitled to, a refund liability, and an asset (with a matching adjustment to cost of sales) for your right to recover the products. If the substance is a consignment sale, the consignment guidance applies instead. At each reporting date you update the refund liability, and the adjustment goes to revenue. Exchanging one product for another of the same type, quality, condition and price (a different colour or size) is not a return. Returning a defective product for a working one is judged under the warranty guidance.

Warranties. An assurance-type warranty only gives assurance that the product meets agreed specifications. It is not a separate performance obligation. A service-type warranty gives the customer a service in addition to that assurance. It is a separate performance obligation, so you allocate part of the transaction price to it. If you promise both and cannot reasonably account for them separately, treat them together as a single performance obligation. Warranties can arise from the contract, the law or your customary business practice.

Other arrangements. In a bill-and-hold sale, the customer has control only if all four criteria are met: the reason is substantive, the product is identified separately as the customer's, it is ready for physical transfer, and you cannot use it or direct it to another customer. You must then consider remaining obligations such as custody and allocate part of the price to them. Repurchase agreements come in three forms: a forward (obligation to repurchase), a call option (right to repurchase) and a put option (obligation at the customer's request). Customer options for free or discounted goods, such as loyalty points, renewal options and sales incentives, can create a separate performance obligation (a material right). Licensing guidance sits in paragraphs B52 to B63B.

Key rules to remember

Right of return: what to recognise
Revenue = price × units NOT expected to be returned; Refund liability = price × units expected to be returned; Asset = cost of units expected to be returned (less any recovery cost)
Cost of sales is reduced for the asset. Update the refund liability at each reporting date; the change goes to revenue.
Exchange is not a return
Same type, quality, condition and price exchange → not a return
Defective-for-working exchanges follow the warranty guidance.
Warranty test
Assurance only → not a separate performance obligation; extra service → separate performance obligation
If both are promised and cannot be separated, treat as one performance obligation.
Bill-and-hold criteria (all four)
Substantive reason + separately identified + ready for transfer + no ability to use or redirect
Plus the control test in paragraph 38. If met, consider custodial obligations and allocate price to them.
Repurchase forms
Forward = obligation; Call = right; Put = obligation at customer's request
Identify the form first, as the accounting depends on it.
Material right allocation
Allocate transaction price on relative stand-alone selling prices, including the option
The option's stand-alone price reflects the discount and the likelihood of exercise.

How to solve Specific Applications: Licensing, Warranties, Repurchase and Others questions

Use this sequence for any question on special arrangements.

  1. 1Name the arrangement: return right, warranty, bill-and-hold, repurchase, consignment, licence or customer option.
  2. 2Check substance. An unconditional right of return may really be a consignment sale.
  3. 3Decide whether control has passed. For bill-and-hold, test all four criteria. For repurchase, identify forward, call or put.
  4. 4Identify the performance obligations. Separate a service-type warranty or a material right from the main product.
  5. 5Allocate the transaction price using relative stand-alone selling prices where there is more than one obligation.
  6. 6Recognise revenue only for what you expect to be entitled to, and book the refund liability, recovery asset or contract liability.
  7. 7Pass journal entries and state the amounts for revenue, liability and cost of sales clearly.

Quickest way: Right-of-return three-line shortcut

When to use it: Use for numerical questions on sales with a return right and an expected return percentage.

  1. Revenue = total sales × (1 − expected return %).
  2. Refund liability = total sales × expected return %.
  3. Recovery asset = cost of expected returns; cost of sales = total cost × (1 − expected return %).
  4. Check that revenue + refund liability equals the cash or receivable.

Common mistakes in Specific Applications: Licensing, Warranties, Repurchase and Others

  • Recognising full revenue on goods sold with a right of return and booking a provision for returns.

    Students carry over the old approach of recording sales and then estimating returns.

    Fix: Recognise revenue only for goods not expected to return. Book a refund liability for the rest.

  • Reducing the refund liability's recovery asset incorrectly or forgetting it.

    Students focus on revenue and ignore cost.

    Fix: Recognise an asset for the right to recover goods and reduce cost of sales by the same amount.

  • Treating every warranty as a separate performance obligation.

    Students see the word warranty and allocate price automatically.

    Fix: Allocate price only to a warranty that gives a service beyond assurance of specifications.

  • Recognising bill-and-hold revenue when only some criteria are met.

    Students rely on the customer's request alone.

    Fix: All four criteria must be met, and custodial services may be a separate obligation.

  • Treating a size or colour exchange as a return.

    Both involve goods coming back.

    Fix: An exchange for the same type, quality, condition and price is not a return.

  • Ignoring loyalty points because no goods have been delivered.

    Students think no obligation exists until points are redeemed.

    Fix: Points that give a material right are a performance obligation. Defer the allocated amount as a contract liability.

Worked examples

Example 1

Sundaram Traders sells 1,000 units at ₹500 each (cost ₹300 each) for cash. Customers may return units within 30 days. Sundaram expects 5% (50 units) to be returned. Show the accounting on sale.

Show the solution
  1. Total sales = 1,000 × ₹500 = ₹5,00,000. Cash received ₹5,00,000.
  2. Expected returns = 50 units. Revenue = 950 × ₹500 = ₹4,75,000.
  3. Refund liability = 50 × ₹500 = ₹25,000.
  4. Total cost = 1,000 × ₹300 = ₹3,00,000. Cost of sales = 950 × ₹300 = ₹2,85,000.
  5. Asset for right to recover = 50 × ₹300 = ₹15,000.
  6. Entries: Dr Cash ₹5,00,000; Cr Revenue ₹4,75,000; Cr Refund liability ₹25,000. Dr Cost of sales ₹2,85,000; Dr Right-to-recover asset ₹15,000; Cr Inventory ₹3,00,000.

Answer: Revenue ₹4,75,000; refund liability ₹25,000; cost of sales ₹2,85,000; recovery asset ₹15,000.

Example 2

Kaveri Appliances sells a machine for ₹1,10,000. It includes a one-year warranty against manufacturing defects as required by law, and an optional extended service plan for two further years that is bundled in the price. Stand-alone selling prices: machine ₹1,00,000; extended service plan ₹20,000. How is the price accounted for?

Show the solution
  1. The one-year defect warranty gives assurance of specifications. It is assurance-type, so it is not a separate performance obligation.
  2. The extended two-year plan gives a service beyond assurance. It is a separate performance obligation.
  3. Total stand-alone prices = ₹1,00,000 + ₹20,000 = ₹1,20,000.
  4. Machine allocation = 1,10,000 × 1,00,000 ÷ 1,20,000 = ₹91,667 (rounded).
  5. Service plan allocation = 1,10,000 × 20,000 ÷ 1,20,000 = ₹18,333 (rounded).
  6. Recognise ₹91,667 when control of the machine passes. Recognise ₹18,333 over the two years of service, with the unearned part held as a contract liability.

Answer: Machine revenue ₹91,667 on delivery; service plan ₹18,333 recognised over its period; the assurance warranty gets no allocation.

Exam tips

  • MCQs often test which arrangement is a separate performance obligation. Learn the assurance versus service warranty test cold.
  • In return-of-goods numericals, show all three items: revenue, refund liability and recovery asset. Marks are split across them.
  • For bill-and-hold, list all four criteria by letter and tick each against the facts in the case.
  • Say clearly whether you treat an arrangement as a sale, a lease or a financing when answering repurchase questions, and give the reason.
  • In loyalty point questions, show the relative stand-alone price allocation and the deferred contract liability.

Practice questions from Revenue from Contracts with Customers (Ind AS 115)

Specific Applications: Licensing, Warranties, Repurchase and Others in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Specific Applications: Licensing, Warranties, Repurchase and Others: frequently asked questions

Is a provision for returns still booked under Ind AS 115?

You book a refund liability for the consideration you expect to refund, not a provision for lost profit. You also recognise an asset for the right to recover goods. Revenue is reduced for the expected returns.

What is the difference between assurance-type and service-type warranty?

An assurance-type warranty only promises the product meets agreed specifications. A service-type warranty gives an additional service. Only the service-type warranty is a separate performance obligation.

When can revenue be recognised in a bill-and-hold arrangement?

Only when the customer has obtained control and all four criteria are met: substantive reason, separately identified product, ready for transfer, and no ability for you to use or redirect it. You must also consider custodial services as a remaining obligation.

Are customer loyalty points a performance obligation?

They can be. Options for free or discounted goods, including award credits, may give a material right. You allocate part of the transaction price to them and defer it until redemption or expiry.