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Hi,
in the event of a sale or return contract, what will happen if the inventory held by the entity gets impaired due to a reason outside the entity’s control(i.e. changes in technology)?Do you mean sales with a right of return (for which the reporting entity should recognise a refund liability for the expected returns) or consignment contract (e.g. where distributor will return goods that are not sold on within a specified period)?
sales with a right of return to which the entity is entitled to a refund. let me give my thought on what I was thinking:
– control and risk of ownership not yet transferred to the purchasing entity- as this is achieved at the point of sale.
– if impaired (reason outside their control), they got the right to return and will effectively claim the full amount at the value of inventory at the point of purchase from the supplier. it is the selling entity that suffers the hit.
– if impaired(reason within their control), they got the right to return but this time they won’t get full compensation. the value of the receivable will be reduced by the impairment loss.Is this correct?
1. Sale with right of return is like a department store/website selling to retail customers who can return products if they are not happy with them within a specified period (may be statutory) – for the reporting entity, sales are sales, but provision is made for the best estimate of the liability (e.g. suppose 1% of sales are returned for whatever reason).
2. I think you are talking about a consignment contract where there is no sale to the purchaser (“consignee”) until the purchaser (e.g. a car distributor) has sold the items and any unsold items are returned to the seller/manufacturer (“consignor”) when the period for which the goods were consigned has elapsed.
If your reporting entity is the seller/manufacturer, consignment goods are inventory and would be written down if NRV is less than cost.
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