Spring 2015 issue of Horizons

FEATURE | The New Revenue Recognition Standard: Changes Ahead for Your Top & Bottom Line

Revenue Recognition: An Example

An entity enters into 100 contracts with customers. Each contract includes the sale of 1 product for $100 . After control of a product transfers, customers have 10 days to pay and all amounts are considered collectible. The entity’s cost of each product is $60 . Customers are allowed to return any unused product within 30 days for a full refund.

The entity has significant experience in estimating returns for this product and customer class and estimates that 97 products will not be returned . The entity estimates that the costs of recovering the products will be immaterial and that the returned products can be resold at a profit.

Upon transfer of control of the 100 products, the accounting looks as follows:

Accounting prior to implementation of ASU 2014-09

Accounting after implementation of ASU 2014-09

Debit

Credit

Debit

Credit

Accounts receivable $10,000 ($100 x 100 products transferred)

Accounts receivable $10,000 ($100 x 100 products transferred)

Revenue $9,700 ($100 x 97 products not expected to be returned) Allowance for estimated returns (contra receivable) $300 ($100 x 3 products expected to be returned)

Revenue $9,700 ($100 x 97 products not expected to be returned) Refund liability $300 ($100 x 3 products expected to be returned)

Cost of sales $5,820 ($60 x 97 products not expected to be returned) Asset $180 ($60 x 3 products for its right to recover products from customers on settling the refund liability)

Cost of sales $5,820 ($60 x 97 products not expected to be returned)

Inventory $5,820 ($60 x 97 products not expected to be returned)

Inventory $6,000 ($60 x 100 products)

Prior to ASU 2014-09, the footnote disclosure related to revenue for this company may have been as brief as follows: Sales are recorded when products are shipped to customers. Provisions for estimated returns and allowances are provided for in the same period the related sales are recorded.

As can be seen from the example, the new guidance requires the presentation of an asset related to the entity’s right to recover products which is measured at the entity’s cost for each product and a refund liability which is measured at the amount of consideration receivable for which the entity does not expect to be entitled.

page 28 | horizons Spring 2015