Related to Step 3

Example —Consideration payable to a customer

An entity that manufactures consumer goods enters into a one-year contract to sell goods to a
customer that is a large global chain of retail stores. The customer commits to buy at least
$15 million of products during the year. The contract also requires the entity to make a non-
refundable payment of $1.5 million to the customer. The $1.5 million payment will compensate
the customer for the changes it needs to make to its shelving to accommodate the entity’s
products.
The entity concludes that the payment to the customer is not in exchange for a distinct good or
service that transfers to the entity. This is because the entity does not obtain control of any rights
to the customer’s shelves. Consequently, the entity determines that, the $1.5 million payment is a
reduction of the transaction price.
Consequently, as the entity transfers goods to the customer, the entity reduces the transaction
price for each good by 10 per cent ($1.5 million ÷ $15 million). Therefore, in the first month in
which the entity transfers goods to the customer, the entity recognises revenue of $1.8 million
($2.0 million invoiced amount less $0.2 million of consideration payable to the customer).
As per IFRS 15
If consideration payable to a customer is accounted for as a reduction of the transaction price, an entity
shall recognize the reduction of revenue when (or as) the later of either of the following events occurs:

(a) The entity recognizes revenue for the transfer of the related goods or services to the
customer; and

(b) The entity pays or promises to pay the consideration (even if the payment is conditional
on a future event). That promise might be implied by the entity’s customary business
practices.
Related to Step 3
Example —100 items sold and 3 items were expected to be returned
An entity enters into 100 contracts with customers. Each contract includes the sale of one product for
$100 (100 total products × $100 = $10,000 total consideration). Cash is received when control of a
product transfers. The entity’s customary business practice is to allow a customer to return any unused
product within 30 days and receive a full refund. The entity’s cost of each product is $60.

Because the contract allows a customer to return the products, the consideration received from the
customer is variable. To estimate the variable consideration to which the entity will be entitled, the
entity decides to use the expected value method because it is the method that the entity expects to
better predict the amount of consideration to which it will be entitled. Using the expected value
method, the entity estimates that 97 products will not be returned.

Upon transfer of control of the 100 products, the entity does not recognise revenue for the three
products that it expects to be returned. Consequently, in accordance with IFRS 15, the entity recognises
the following.

 Revenue of $9,700 ($100 × 97 products not expected to be returned);

 A refund liability of $300 ($100 refund × 3 products expected to be returned); and
 An asset of $180 ($60 × 3 products for its right to recover products from customers on settling
the refund liability)

The journal entries will be

1) For recording of revenue

Dr. Cash a/c 10000

Cr. Revenue a/c 9700

Cr. Refund Liability a/c 300

2) For recording of related cost of sales

Dr. Cost of Sales a/c 5,820

(97units x $ 60)

Dr. Asset(the right to receive returned goods) a/c 180

(3 units x $ 60)

Cr. Stock a/c 6,000

(100 units x $ 60)

WHEN ITEMS RETURNED WERE 4 INSTEAD OF 3, THE PROPOSED ENTRIES WILL BE:
1)

Dr. Refund Liability a/c 300

Dr. Revenue a/c 100

Cr. Cash a/c 400

2)

Dr. Stock a/c 240

(4units x $ 60)

Cr.Asset(the right to receive returned goods) a/c 180

(3units x $ 60)

Cr. Cost of Sales a/c (P/L) 60

(1 unit x $ 60)