From 1 January 2027, the accounting treatment of revenue from sales of goods with a right of return will change. Companies will need to give greater consideration to the proportion of goods sold that customers are expected to return.
The change will primarily affect companies where product returns are a normal part of business operations, such as online retailers.
Under paragraph 20 of the new Estonian Accounting Standard (EAS) 10, revenue may only be recognised at the time of sale to the extent that the goods are not expected to be returned.
Any consideration received or receivable for goods expected to be returned must be recognised as a refund liability. Companies must also recognise an asset representing their right to recover the returned goods and adjust the cost of goods sold accordingly.
This means that management estimates will play an increasingly important role in revenue recognition: what proportion of the goods sold is likely to be returned?
Estimates should be based on the company's historical experience with product returns. Where necessary, companies should also consider return patterns across different product categories, sales terms and other factors that may affect return rates.
For example, suppose an online retailer sells goods worth €100,000. Based on historical experience, customers return an average of 10% of the goods purchased. If this estimate remains reasonable under current circumstances, the company recognises €90,000 as revenue and the remaining €10,000 as a refund liability. It must also recognise the asset relating to the expected returns and adjust the cost of goods sold accordingly.
However, companies should not automatically apply the average return rate from previous periods. For example, introducing a new product category or changing sales terms may mean that historical return data no longer provides a sufficiently accurate basis for the estimate.
Management estimates must be realistic, reasonable and properly documented. It is important to ensure that the underlying data and assumptions, as well as the method used to determine the estimated return rate, can be understood and verified at a later date.
Estimates are not a one-off exercise. They must be updated when necessary to reflect new information.
Ahead of the implementation of the new EAS 10, companies should review whether they have sufficient data on product returns and whether that data provides a reliable basis for estimating future returns.
The key change is straightforward: the total amount invoiced may no longer equal the revenue recognised. Revenue will also depend on management's estimate of the proportion of sales expected to remain final.
I have explored how management estimates are developed and documented, and how they affect financial statements, in more detail in my article “Management estimates in financial statements”.
Sources: EAS 10 “Revenue recognition”, paragraph 20(a) of the version effective from 1 January 2027; EAS 1 “General principles for preparing annual financial statements”, paragraphs 74–78.
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