While visiting a client, you hear employees arguing about the accounting for sales returns. The Sales Manager believes that granting more generous return provisions can give the company a competitive edge and increase sales revenue. The Controller cautions that, depending on the terms granted, loose return provisions might lead to non-GAA revenue recognition. The company CFO breaks in and asks you to research the issue and provide an authoritative answer. Of specific concern to him are:
- What is meant by “revenue recognition?” Are there requirements that must be met?
- What is the authoritative literature addressing revenue recognition when the right of return exists?
- What is meant by “right of return”? What is meant by “Bill and Hold”?
- How should the organization account for a transaction when there is a right of return?
- When goods are sold on a bill-and-hold basis, what conditions must be met to recognize revenue upon receipt of the order? Are there special rules?
