Question

Gators technology CO. introduced a new Product X to the market on January 1, 201X. It carries a one year warranty. In its first month on the market, Gators sold 1,000 Units of this product for a total of $1,000,000. CUstomers have an unconditional right to return in 90 days if they are not completely satisfied with the product. During the first month, customers returned 400 units of the new product that they had purchases for $400,000. Required : Determine when it would be appropriate for Gators to recognize revenue from the first month sales of this product. Base your evaluation on IAS 18.

Answer 1

Provision: According to IAS 18, Recognition, as defined means incorporating an item that meets the definition of revenue in the income statement when it meets the following criteria:

• It is probable that any future economic benefit associated with the item of revenue will flow to the entity, and
• the amount of revenue can be measured with reliability.

And in case of goods with a return policy the IAS would be interpreted as to recognize the sale but to make suitable provision for returns based on previous experience.

Interpretation: On analysing the above we understand that in case of complete sales the entity has to measure the complete revenue to be generated by the sale of goods provided that it is sure that the money flow into the entity and they can reliably measure the value of such sales and for the goods which have a return clause in it, it would be appropriate to create the provision for such returns based on past experience rather that deducting the revenue originally recorded.

Case solution: So for the above mentioned case, keeping in mind the interpretation of the IAS it would be approriate to say that Gators Technology CO should book the entire revenue for 1000 units being $ 1,000,000 at the time of final sale. However, by the analysis of past records it is clear that normally 400 units are returned by the customers it shall create a reuturn provision for $ 400,000 rather than lowering the original revenue booked.