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IAI Actuarial Core Principles · Business Finance · Construction and features of company accounts and reports

Sundaram Foods Ltd sells goods on 31 March, the year end, with a right of return. Which treatment of revenue is most appropriate for goods sold with an estimated 4% return rate?

Revenue should be recognised for the 96% of goods not expected to come back, and a refund liability should be set up for the expected 4% of returns. This avoids overstating revenue while still reflecting the sale.

  1. ARecognise revenue for 100% of the sales and ignore returns until they occur
  2. BRecognise revenue only when the return period expires, for all sales
  3. CRecognise revenue for 96% of sales and a refund liability for the expected 4% returnsCorrect
  4. DRecognise revenue at 100% and charge the 4% to distribution costs
  5. Defer all revenue to the next year as a contract liability

Explanation

Revenue is recognised only for goods not expected to be returned, with a refund liability for the expected returns. Recognising all revenue overstates income; deferring it all is too prudent.

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