The uncertainty and disruption caused by COVID-19 will likely lead to challenges in making reliable assumptions and estimates or force the company to more frequently update their estimates of expected sales returns.

What’s the issue?

COVID-19 has significant consequences for society, but also impacts our behaviour as customers. Change is rapid and often unexpected. Given the overall uncertainty it is likely that companies need to exercise more judgement when determining if a sale has occurred and what the expected returns are. The question arises: how to account for sales with a right of return under Dutch GAAP?

Getting into more detail

For sale of goods revenue is normally recognised when certain criteria are met. This is based primarily on the transfer of risks and rewards. Normally, this will occur when a buyer obtains legal title to the goods or possession of the goods.
A company does not recognise revenue if it retains significant risks and rewards of ownership. If the company has only retained an insignificant part of the risks, sale and revenue can be recognised. When there is a sale with a right of return it is furthermore necessary that the company can reliably estimate the amount of the returns. A company should make this assessment based on all relevant facts and circumstances of the transaction. This also means that if no reliable estimate can be made of the returns, revenue cannot be recognised.

If the company can estimate the returns reliably, revenue can be recognised less a provision for the expected returns. The provision is based on the full sales prices of the expected returns.

The uncertainty or disruption caused by COVID-19 could likely lead to companies more frequently updating their estimate of the expected sales returns and might even lead to challenges in making appropriate assumptions and reliable estimates. This would cause a deferral in the recognition of revenue.

Upon return the company needs to consider whether the returned products should be impaired for damage or obsolescence.

Given the circumstances and the related uncertainties the company may need to provide more disclosures around these uncertainties and changes in estimates.

Actions for management to take now

  • Determine if a reliable estimate can be made of the probability and the level of returns.
  • Determine relevant disclosure requirements with respect to significant judgements and estimates made by the company.
Fred Versteeg

Partner Department of Professional Practice

KPMG Nederland