ACCA SBR ^UK Syllabus C. Reporting The Financial Performance Of A Range Of Entities - Specific IFRS 15 Scenarios - Notes ^{6 / 8}

Here we mean the Customer has the right to receive:

1. A refund 
2. Credit 
3. A different product in exchange

(Please note the right to get for example a different colour or size isn't a return here)

Accounting treatment for Right to Return items

1. Reduce Revenue by the expected value of returns
2. Instead Dr Revenue Cr Refund liability

(Inventory of expected return items excluded from cost of sales)

In subsequent periods, the vendor updates its expected levels of returns, adjusting the measurement of the refund liability and the associated inventory asset.

Assurance Warranties 
These (normally free) warranties simply provide assurance the product complies with agreed-upon specifications

These are just bundled into the revenue for the product and a provision for the warranty costs is made using IAS 37 as normal

Service Warranties 
These (normally paid for) warranties provides a service in addition to the assurance.

These are normally:

1) Not required by law
2) For longer periods

These warranties are therefore separate performance obligations

Example

A customer buys an item for $100,000, with a one-year standard warranty that specifies the equipment will comply with the agreed-upon specifications and will operate as promised for a one-year period from the date of purchase.

She also buys an extra $2,000 two-year warranty commencing after the expiry of the standard one- year warranty.

There are two warranties in this contract:
1. assurance-type warranty — for first year after purchase
2. service-type warranty — for two years after expiry of the initial standard warranty.

The service-type warranty and is accounted for as a separate performance obligation. Deferred revenue of $2,000 is recognised until the performance obligation is satisfied.

The assurance-type warranty is accounted for using IAS 37 Provisions

When the upfront fee received is just an advance payment for future services, recognised as revenue when those future services are provided.

The Principal controls the good before transfer to the customer

The Agent does not control the good before transfer to the customer. So the following normally are indicators you're an agent

• Another party is primarily responsible for fulfilling the contract 
• You don't take inventory risk before or after a customer order
• You don't set prices 
• You receive commission only 
• You take no credit risk for the amount receivable

Accounting treatment for Principal
Show gross revenue and cost of sales

Accounting treatment for Agent
Show commission only as revenue