IFRS 15 for the TMT industries – Contracts with right of return

27 June 2018

Telecommunications sales are often accompanied by the customer having a right of return under which the customer may be entitled to a refund (for example, in some jurisdictions there is a ‘cooling off’ period during which a customer can cancel a contract with no penalty), a credit that can be applied against another purchase, or another product in exchange.

To the extent that the vendor expects customers to exercise the right of return, revenue is not recognised for the related goods or services, even though these may already have been transferred to the customer.  Instead, a refund liability is recognised together with an asset for the right to recover the original asset (depending on whether the item recovered would have any value).



Telecom Co. sells mobile phones with a right of return for one month after the purchase.

The mobile phone sells for $1,000 (cost $800) each, and Telecom Co. estimates that 10% of mobile phones are returned within one month.

How should Telecom Co. account for the right of return?

Telecom Co. should recognise a refund liability to the extent that it expects the mobile phones to be returned.

  Dr Cr
Dr Cash $1,000  
Cr Refund Liability (10% x $1,000)   $100
Cr Revenue ($1,000 - $900)   $900
Deferring revenue for the 10% portion expected to be returned

Telecom Co. then recognises a right to recover the asset as follows:

  Dr Cr
Dr Right to recover goods ($800 x 10%) $80  
Dr Cost of goods sold ($800-$80) $720  
Cr Inventory   $800
Recognise right to recover phone

Current practice under IAS 18

Currently, common practice would be to recognise a provision for expected returns but not the right to recover goods asset.

Practical implication on systems and processes

Some of the practical implications on systems and processes for Telecom Co. include:

  • Systems to capture historical data on returns
  • Processes to predict future levels of returns
  • System to account for the right of return and right to recover goods.