Right of return

A return right changes the measurement of a transferred sale. It does not create another performance obligation merely because the seller stands ready to accept returns. ASC 606-10-55-23 through 55-25 states the three-part model:

• recognize revenue for the amount expected to be retained;
• recognize a refund liability for the amount expected to be refunded or credited; and
• recognize an asset for the right to recover returned products, with the related adjustment to cost of sales.

Measure both sides of the estimate

Apply the variable-consideration guidance to estimate retained consideration. Measure the recovery asset from the former carrying amount of products expected back. Subtract expected recovery costs and any decrease in the returned goods' value. Present the recovery asset separately from the refund liability.

For $150,000 of transferred sales with $90,000 carrying cost and an 8 percent return estimate, revenue is $138,000 and the refund liability is $12,000. Gross recovery is $7,200. If recovery costs are $600 and expected value decline is $300, the recovery asset is $6,300 and cost of sales is $83,700.

Update entitlement, refund liability, and recovery asset at each reporting date. ASC 606-10-55-26 and 55-27 governs those updates. Same-type exchanges at the same quality, condition, and price are outside this return model. Defective-product exchanges follow the warranty boundary; see 55-28 and 55-29.

The schedule checks supplied estimates. It cannot prove control transfer, select the return rate, assess returned-product value, or classify an exchange.