How to approach it
- For each incentive, name the IFRS 15 concept it raises: significant financing component, variable consideration.
- Financing: split credit terms into one year or less (practical expedient) and longer (discount at a rate reflecting the customer's credit). Revenue at cash selling price; the rest is interest over time.
- Return right: estimate expected returns; recognise revenue only for goods not expected back, with a refund liability and a right-to-recover asset at cost.
- Constrain variable consideration so a significant reversal is highly unlikely. Conclude for each incentive.
Key rules to apply
- IFRS 15: adjust the transaction price for the time value of money when the financing benefit is significant.
- Practical expedient: no adjustment if the period between transfer and payment is one year or less.
- Rights of return create variable consideration, estimated with expected value or most likely amount, subject to the constraint.
- Revenue is not deferred to the end of the return period; it is recognised net of expected returns.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- General statements about IFRS 15 that never mention financing or variable consideration (examiners' point).
- Not separating credit periods under and over one year.
- Deferring all revenue until the return window closes.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q4 without copying it.
Original practice question
Financing component and returns
(a) Goods with a cash price of Rs 1,000,000 are delivered on 1 January 2025; the customer will pay Rs 1,166,400 on 31 December 2026 (implied rate 8%). (b) 100 units are sold for Rs 5,000 each (cost Rs 3,000) with a 90-day full-refund return right; 6% are expected back.
Required: Show the 2025 accounting.
Worked solution
| Item | 2025 effect |
|---|---|
| (a) Revenue at delivery | Rs 1,000,000 |
| (a) Interest income 2025: 1,000,000 × 8% | Rs 80,000 (Rs 86,400 in 2026) |
| (b) Revenue: 94 units × 5,000 | Rs 470,000 |
| (b) Refund liability: 6 × 5,000 | Rs 30,000 |
| (b) Right to recover goods: 6 × 3,000 | Rs 18,000 |
| (b) Cost of sales: 94 × 3,000 | Rs 282,000 |
Answer: Revenue Rs 1,470,000 plus interest income Rs 80,000; the return right is handled through estimates, not by deferring all revenue.