Recognise three amounts when control transfers
Ind AS 115 B20–B27 addresses transfers with a right to return. Recognise revenue only for consideration to which the entity expects to be entitled, a refund liability for consideration received or receivable to which it does not expect to be entitled, and a separate asset for the right to recover products when settling that liability. Apply the transaction-price and variable-consideration constraint requirements in measuring revenue. The expectation of returns does not make all consideration revenue initially.
Read the applicable text: MCA: Ind AS 115, paragraphs 50–59 and B20–B27.
Calculate the two return balances on different bases
The refund liability follows the consideration expected to be returned. The recovery asset starts from the former carrying amount of expected returned products, less expected recovery costs and any decrease in value. Recognise the corresponding adjustment to cost of sales and present the asset separately from the liability. Do not value returned products at their selling price or reduce the liability merely because they have salvage value.
Reassess at each reporting date
Update the expected consideration, refund liability and recovery asset on current evidence. Use product or cohort data, return timing, condition and recovery experience. Reconcile actual returns, cash refunds, units recovered and revised expectations. Under B24, changes in expected refunds adjust revenue. Under B25, update the recovery asset separately; a change confined to recovery costs or product value does not itself change revenue or the refund liability.
Screen exchanges and defects separately
B26 excludes customer exchanges for products of the same type, quality, condition and price from this return accounting. B27 directs defective-product exchanges for functioning products to the warranty guidance. Review the actual promise before including those events in a return cohort. The examples assume qualifying sales, a full refund per return and the stated estimates satisfy the constraint unless stated.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Three initial balances
Sell 100 units at ₹1,000; cost is ₹600 per unit and five returns are expected. With ₹20 recovery cost per returned unit and no value decrease, revenue is ₹95,000, refund liability ₹5,000 and recovery asset ₹2,900. Cost of sales is ₹57,100.
Illustrative example 2: Loss of recoverable value
Assume eight expected returns of units formerly carried at ₹500 each. Expected recovery cost is ₹30 and value decrease ₹70 per unit. The recovery asset is ₹3,200, rather than the ₹4,000 former carrying amount.
Illustrative example 3: Expected returns rise
On 100 sales at ₹1,000 with ₹600 former cost and no recovery costs, expected returns rise from five to eight with none settled. Revenue decreases by ₹3,000, liability increases by ₹3,000 and the recovery asset increases by ₹1,800 with a corresponding ₹1,800 decrease in cost of sales.
Illustrative example 4: Actual returns against the liability
An opening refund liability of ₹5,000 covers five expected units at ₹1,000. Two are returned and refunded; the expected total remains five. The outstanding liability is ₹3,000. If the corresponding recovery asset was ₹600 per unit with no new changes, ₹1,200 moves from the recovery asset to recovered inventory, assuming it is held as inventory at that carrying amount; ₹1,800 remains in the recovery asset.
Illustrative example 5: Same-type exchanges are not counted as returns
A record of 12 product movements includes seven qualifying same-type, quality, condition and price exchanges and five actual returns. Use five for the stated return review; do not model 12 cash refunds merely from the movement count.
Illustrative example 6: Recovery cost changes without changing the refund
Ten expected returns carry ₹800 of refundable consideration and ₹500 former cost each. Recovery cost rises from ₹20 to ₹50 per unit with no other change. The recovery asset declines from ₹4,800 to ₹4,500, a ₹300 reduction with a corresponding increase in cost of sales on the stated facts. The refund liability remains ₹8,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Read the return, exchange and warranty terms | Contract and customer policy |
| 2 | Identify the control-transfer population | Sales and dispatch records |
| 3 | Separate return rights from other movements | Cohort and exception register |
| 4 | Estimate returns and assess the constraint | Historical and forward-looking evidence |
| 5 | Calculate expected refunds | Refund liability schedule |
| 6 | Trace former inventory cost and recovery effects | Cost and condition data |
| 7 | Record the separate recovery asset and cost adjustment | Accounting entries and support |
| 8 | Reconcile actual refunds and goods recovered | Cash, stock and return records |
| 9 | Update estimates at reporting date | Revised assumptions and movement bridge |
| 10 | Verify presentation and retain the file | Ledger and closing review |
Sixteen practitioner FAQs
1. Does a right to return mean no revenue until the window closes?
Apply B20–B27 and recognise the amount expected to be earned, subject to the constraint.
2. Can all consideration be recognised as revenue if cash is received?
Recognise the expected refund liability separately.
3. Is the refund liability measured at product cost?
No. It follows refundable consideration.
4. Is the recovery asset measured at the selling price?
No. Start from former carrying amount and adjust for expected recovery cost and loss of value.
5. Can the recovery asset be offset against the refund liability?
Present it separately as required by B25.
6. Does a higher recovery cost necessarily change the refund liability?
Not if expected refundable consideration is unchanged.
7. Do all exchanges count as returns?
B26 excludes qualifying exchanges of the same type, quality, condition and price.
8. What if a defective item is exchanged for a functioning one?
Review the warranty guidance under B27.
9. Do historical return rates decide the estimate by themselves?
Use supported current expectations and relevant cohort data.
10. When are estimates updated?
At the end of each reporting period, with the required changes recognised.
11. Does an actual refund justify keeping the old liability unchanged?
Reconcile the settled portion and any revised expectation.
12. What happens when the recovered goods are received?
Reconcile the relevant recovery asset to the goods now held and reassess their condition.
13. Can cash receipts substitute for estimates of entitlement?
No. Measure expected entitlement and the refund liability under the standard.
14. How should a discount affect a return estimate?
Use actual contractual refundable consideration and the transaction-price requirements.
15. What if the returned product may have little value?
Reflect expected value decreases in the recovery asset.
16. Which three balances should the reviewer tie out?
Revenue, refund liability and the separate recovery asset, including the corresponding cost-of-sales effect.