How to account for sales with a right of return

Sales with a right of return are common in industries such as retail, e-commerce, and manufacturing. Accounting for these transactions requires a careful separation between recognized revenue and estimated returns. Both IFRS 15 and ASC 606 provide aligned guidance that requires companies to recognize revenue net of expected returns, record a refund liability, and track a separate return asset for goods expected to be recovered. This ensures that financial statements reflect a realistic estimate of what the company will ultimately retain from sales.

A right of return does not preclude revenue recognition but modifies it.

Under both IFRS 15 and ASC 606, entities can recognize revenue at the time of sale even if customers have the right to return goods, as long as:

• Control of the product has transferred to the customer

• The company can reasonably estimate expected returns

In such cases, revenue is recognized for the portion not expected to be returned, and the remainder is accounted for as:

• A refund liability for the expected repayments to customers

• An asset for the right to recover returned inventory

Component	Accounting Treatment
Portion of sale retained	Recognize as revenue
Portion expected to return	Refund liability (contract liability)
Goods expected to be returned	Return asset (inventory-like)

Companies must estimate returns using historical and current data.

To apply this model, the entity must estimate the expected return rate based on:

• Historical return patterns

• Current trends and product types

• Changes in pricing, policies, or customer behavior

The return estimate is updated at each reporting date and treated as a variable consideration constraint under IFRS 15 and ASC 606.

Example: A company sells $100,000 of goods with an expected return rate of 5%.

• Revenue recognized: $95,000

• Refund liability: $5,000

• Return asset (cost basis): $3,000 (if margin is 40%)

The refund liability represents a future cash outflow or credit to the customer.

A refund liability is recognized for the amount expected to be refunded to customers. This is often in the form of:

• Cash refunds

• Credit notes

• Store credits

It is presented as a contract liability on the balance sheet and updated for:

• Changes in estimated returns

• Actual returns made

Journal entry to record sale with expected returns:

Dr. Cash or Accounts receivable     100,000  
    Cr. Revenue                                95,000  
    Cr. Refund liability                         5,000

The return asset reflects goods the company expects to recover and resell.

A return asset is recognized for the entity’s right to recover goods from customers. It is measured at the cost of inventory, adjusted for:

• Potential damage or obsolescence

• Restocking costs

This asset is separate from normal inventory and is classified similarly, but requires its own disclosure.

Journal entry to recognize return asset:

Dr. Return asset (inventory)       3,000  
    Cr. Cost of goods sold                3,000

Adjustments are made as actual returns are processed.

When customers return products:

• The refund liability is reduced

• The return asset is removed

• The inventory is restocked, or scrapped if unusable

If returns are lower or higher than expected, companies must adjust revenue, liabilities, and assets accordingly.

Example adjustment when returns are lower than expected:

Dr. Refund liability                2,000  
    Cr. Revenue                             2,000

Disclosures must explain the return estimate and its financial impact.

Both IFRS and US GAAP require disclosure of:

• Return policies and business practices

• Estimation techniques and judgments

• Movement in refund liabilities and return assets

• Impacts on revenue from changes in estimates

These disclosures allow stakeholders to assess the quality of revenue and the volatility introduced by return rights.

Presentation of refund liabilities and return assets must remain separate.

Entities must avoid netting:

• Refund liabilities against receivables

• Return assets against inventory

This preserves clarity in financial reporting and aligns with the gross presentation principle under IFRS and GAAP.

Component	Statement	Line item
Refund liability	Balance sheet – liability	Contract liabilities
Return asset	Balance sheet – asset	Other current assets/inventory
Net revenue	Income statement	Revenue, net of returns

Accounting for sales with a right of return requires a balanced, data-driven approach. Proper estimation and clear disclosure ensure that revenue is not overstated, liabilities are recognized for potential refunds, and assets reflect recoverable goods. By applying the structured framework of IFRS 15 and ASC 606, entities can present a more faithful picture of business performance when returns are part of normal operations.

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