Wiley GAAP 2008

Concepts, Rules, and Examples

FAS 48 provides criteria for recognizing revenue on a sale in which a product may be returned (as a matter of contract or a matter of industry practice), either by the ultimate consumer or by a party who resells the product to others. Paragraph 6 states the following:

If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction [is] recognized at time of sale only if all of the following conditions are met:

1. The seller's price to the buyer is substantially fixed or determinable at the date of sale.

2. The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.

3. The buyer's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product.

4. The buyer acquiring the product for resale has economic substance apart from that provided by the seller.

5. The seller does not have significant obligations for future performance to directly bring about the resale of the product by the buyer.

6. The amount of future returns can be reasonably estimated. For purposes of this statement “returns” do not include exchanges by ultimate customers of one item for another of the same kind, quality, and price.

If all of the above conditions are met, the seller recognizes revenue from the sales transaction at the time of the sale and any costs or losses expected in connection with returns are accrued in ...