Int. Acc. FA LECT 2&3: other revenue recognition issues part 5 (Other…
Int. Acc. FA LECT 2&3: other revenue recognition issues part 5
Other revenue recognition issues
Principal-Agent Relationships – Consignments
Right of return
Non-refundable upfront fees
1. RIGHT OF RETURN
customer returns product for (partial) refund of the paid consideration; for credit; another product.
SEE SLIDE FOR ENTRANCE
2. REPURCHASE AGREEMENT
If the company will repurchase this asset for a price greater/equal to its selling price, this is a financing transaction, not a sale!
If the customer has an
to require the seller to repurchase: determine whether the customer has an economic incentive to return.
Economic incentive? If the fair value of the asset is below the repurchase price. Then report this as a financing transaction.
No economic incentive? Treat as a sale with right of return.
Sometimes, companies enter into a contract in which they sell an asset to a customer, but have
an obligation or right
to buy this asset back.
3. BILL AND HOLD ARRANGEMENT
Delays in production schedule
More than sufficient inventory in its distribution channel.
Buyer lacks space to accommodate the product (e.g., buying a bathroom for a house that is still being constructed).
Revenue can only be booked at time of billing when:
Reason for bill-and-hold must be substantive
Product must be identified separately as belonging to the buyer.
The product currently must be ready for physical transfer to the buyer.
Seller may not be able to use the product or direct it to another buyer.
Bill-and-hold: sales contract where a customer has been billed for a product, but the seller retains physical possession of the product.