Hi,
A company for the past two years has provided refunds to customers even though the Terms and Conditions clearly stated that the consideration was not refundable.
The company has now aligned the contractual terms to the company's business practice and now allows customers the right to a refund in cash. Is this a change in accounting policy and therefore there is a need to retrospectively adjust it or do we apply the change from where the the terms and conditions have changed? Please note that the company recognised the unsatisfied performance obligations as a liability in the financial statements for the amount to be refunded.
Thanks
Contractual terms change - Revenue recognition
Re: Contractual terms change - Revenue recognition
Maybe there was a right in law (regardless of your contractual terms) which means in fact that nothing has changed?
Your day-to-day practice also creates an expectation that you will refund even if not contractual so arguably the liability still existed before.
Your day-to-day practice also creates an expectation that you will refund even if not contractual so arguably the liability still existed before.
Re: Contractual terms change - Revenue recognition
It's unclear how the company has reportedly changed its accounting policy. Could you clarify what the previous policy was, and what the current one is? It's important not to mix up changes in accounting policy with changes in business practice
https://ifrscommunity.com/knowledge-bas ... -policies/
https://ifrscommunity.com/knowledge-bas ... -policies/
Re: Contractual terms change - Revenue recognition
The company has now introduced a right to refund in the revenue accounting policy as a consequence of the change in the legal terms and recognised a refund liability. My initial thinking is that before the change the company in control of the transaction and could legally deny the refunds. The change in the legal terms encompasses the business practice and therefore the change should be applied from the date of the modification of the legal terms following the rules of contract modification.
Re: Contractual terms change - Revenue recognition
The implementation of a formal right of return represents new contractual terms rather than a change in accounting policy. Therefore, the question at hand is if the prior accounting policy (i.e., under previous contractual terms) was incorrect. And the first paragraph in this section should answer this question https://ifrscommunity.com/knowledge-bas ... obligation
Re: Contractual terms change - Revenue recognition
Perfect! Thanks!