International Accounting Standard 18 (IAS 18) addresses issues relating to revenue and the various instances whether or not revenue should be recognized. According to this standard, revenue can only be recognized to have accrued to an entity only if it meets a number of key conditions among them being: “..The company has transferred to the buyer the risks and benefits of major type, derived from ownership of the property” (IAS 18 paragraph 14(a)) “The company does not keep to itself any involvement in the management of the assets sold, to the degree usually associated with ownership nor retains effective control over them…” (IAS 18 paragraph 14(b))
In instances where return exists on the specified sales, then specific consideration needs to be made on the transfer of risk and rewards of ownership of the specific goods and also the extent of the transfer of goods to the buyer needs to be ascertained. According to paragraph 16 of the standard (IAS 18), in a case where the entity retains a fundamental portion of property risks, the particular transaction will not be regarded as a sale and therefore no revenues will be recognized. Revenues are only recognized when there is sufficient certainty concerning the earning effort (Kieso, et al, 207).
This specific guidance is of significance to a company in cases where the “transfer of rights or obligations of ownership does not exactly concur with actual transfer of title or transfer of possession to the new buyer upon sale,” (Kieso, et al, 96) the transaction is evaluated on a sale or return basis. It therefore means that depending on the nature of the transaction and the terms of the transaction contract, the sale can only be recognized after the buyer confirms that the goods sold fit the description and purpose intended. The duration between sale and confirmation may be stipulated in the agreement of sale but if this is not the case, reasonable time should be allowed between sale and confirmation/return (Kieso, et al, 89).
In as much as sales with high rates of return can highly cause inventory to be misstated, returns are usually allowed in cases where the goods sent do not fit the specific description or the requirements of the buyer in terms of color, size amount , packaging or purpose. It should also be noted that goods sold may be returned if they are received later than the time they were intended (lapse of time).
Reasonable estimate of returns may be difficult to accurately estimate in circumstances where abnormal levels of waste materials occur in the course of the return. Other incremental costs such as storage costs and transportation expense may also make it difficult to accurately determine the cost of goods returned. Indirect costs of administration that may not necessarily be traced to the actual production of the goods in their present locality or condition may also make it difficult to estimate the value of returns.
In the valuation of all inventories, it should be noted that all stock under the control of the business are estimated at the “lower of costs and net realizable value.” This is in accordance to the accounting standard governing the valuation of inventory (IAS 2 Inventories). The Net realizable value of an item of inventory refers to the estimated selling price of the particular inventory during the normal course of transaction, less the estimated costs to conclude its production and maintain it into a sellable form. The essence of this preposition is that the cost of stocks of inventory is made up of all costs of acquiring the inventory as well as any other incidental cost incurred to put the particular item of inventory into its current position (Kieso, et al, 151).
Works cited
Kieso, Donald, et al. Intermediate Accounting. John Wiley & Sons: Hoboken, 2007. Print.