CODIFICATION RESEARCH CASE (a) According to FASB ASC 605-15-15: 15-2 The guidance in this Subtopic applies to the following transactions: a. Sales in which a product may be returned, whether as a matter of contract or as a matter of existing practice, either by the ultimate customer or by a party who resells the product to others. The product may be returned for a refund of the purchase price, for a credit applied to amounts owed or to be owed for other purchases, or in exchange for other products. The purchase price or credit may include amounts related to incidental services, such as installation. However, exchanges by ultimate customers of one item for another of the same kind, quality, and price (for example, one color or size for another) are not considered returns for purposes of this Subtopic. b. Sales by a manufacturer who repurchases the product subject to an operating lease with the buyer. (b) The guidance in this subtopic (FASB ASC 605-15-15) does not apply to the following transactions: a. Revenue in service industries if part or all of the service revenue may be returned under cancellation privileges granted to the buyer. b. Transactions involving real estate or leases c. Sales transactions in which a customer may return defective goods, such as under warranty provisions. (See Topic 460 regarding warranty obligations incurred in connection with the sale of goods or services that may require further performance by the seller after the sale has taken place.) 8-80 RESEARCH CASE (Continued) > Right of Return (FASB ASC 605-15) 05-3 It is the practice in some industries for customers to be given the right to return a product to the seller under certain circumstances. In the case of sales to ultimate customer, the most usual circumstance is customer dissatisfaction with the product. For sales to customers engaged in the business of reselling the product, the most usual circumstance is that the customer has not been able to resell the product to another party. (Arrangements in which customers buy products for resale with the right to return products often are referred to as guaranteed sales.) (c) Yes, different industries should be allowed to make different types of policies. (FASB ASC 605-15-05). 05-4 Sometimes, the returns occur very soon after a sale is made, as in the newspaper and perishable food industries. In other cases, returns occur over a longer period, such as with book publishing and equipment manufacturing. The rate of returns varies considerably from a low rate usually found in the food industry to a high rate often found in the publishing industry. (d) According to FASB ASC 605-15-25: 25-3 The ability to make a reasonable estimate of the amount of future returns depends on many factors and circumstances that will vary from one case to the next. However, any of the following factors may impair the ability to make a reasonable estimate: a. The susceptibility of the product to significant external factors, such as technological obsolescence or changes in demand b. Relatively long periods in which a particular product may be returned 8-81 CODIFICATION RESEARCH CASE (Continued) c. Absence of historical experience with similar types of sales of similar products, or inability to apply such experience because of changing circumstances, for example, changes in the selling entity’s marketing policies or relationships with its customers d. Absence of a large volume of relatively homogeneous transactions. 25-4 The existence of one or more of the factors in the preceding paragraph, in light of the significance of other factors, may not be sufficient to prevent making a reasonable estimate; likewise, other factors may preclude a reasonable estimate. LO: NA, Bloom: AN, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, Communication, Technology Reporting, Research, Technology, AICPA PC: Communication 8-82