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CFA Level I · CFA Level I Exam · Analyzing Income Statements

An online retailer sells goods with a right of return within 30 days. Based on experience, it expects 5% of the $400,000 of sales in the period to be returned. Under IFRS 15, the retailer most likely recognizes revenue for the period of:

The retailer recognizes $380,000 of revenue and a $20,000 refund liability. IFRS 15 treats expected returns as variable consideration, so revenue is limited to the amount the entity expects to keep, rather than waiting for returns to actually occur.

  1. A$380,000, with a refund liability of $20,000Correct
  2. B$400,000, with returns recorded when they occur
  3. C$400,000, with a refund liability of $20,000

Explanation

Revenue is recognized only for the amount the entity expects to be entitled to: $400,000 × 95% = $380,000. The expected $20,000 of returns is a refund liability (with an asset for the goods expected back). Recording returns only when they occur overstates revenue, and keeping full revenue while accruing a liability double counts.

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