Returns and refund liabilities

Generous return policies help retailers sell, especially online, where return rates can be several times higher than in stores. IFRS 15 requires the expected returns to be reflected when the sale is made, not when the goods come back. This guide works through the entries, the estimate of return rates, and how exchanges, restocking fees and faulty goods differ.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 3 minute read.

Short answer

Returns and refund liabilities arise because customers can return goods. Under IFRS 15, a right of return is variable consideration: the retailer recognises revenue only for goods it expects to keep sold, a refund liability for the amount it expects to refund, and a separate asset for its right to recover the returned goods, measured at their former cost less expected recovery costs and any loss in value. In this guide's example, sales of 1,000,000 with 8% expected returns give revenue of 920,000, a refund liability of 80,000 and a return asset of 43,000.

At a glance

Right of return
Variable consideration
Revenue
Only for goods expected to be kept
Refund liability
Expected refunds
Return asset
Cost of goods expected back, less losses
Presentation
Liability and asset shown gross
Exchanges
Not returns if same type and price
Returns and refund liabilitiesRight of return: Variable consideration; Revenue: Only for goods expected to be kept; Refund liability: Expected refunds; Return asset: Cost of goods expected back, less losses; Presentation: Liability and asset shown gross; Exchanges: Not returns if same type and price.KEY FACTS AT A GLANCEReturns and refund liabilitiesRight of returnVariable considerationRevenueOnly for goods expectedto be keptRefund liabilityExpected refundsReturn assetCost of goods expectedback, less lossesPresentationLiability and asset showngrossExchangesNot returns if same typeand priceTax BakersReturns and refund liabilitiesRight of return: Variable consideration; Revenue: Only for goods expected to be kept; Refund liability: Expected refunds; Return asset: Cost of goods expected back, less losses; Presentation: Liability and asset shown gross; Exchanges: Not returns if same type and price.KEY FACTS AT A GLANCEReturns and refund liabilitiesRight of returnVariable considerationRevenueOnly for goods expected to be keptRefund liabilityExpected refundsReturn assetCost of goods expected back, less lossesPresentationLiability and asset shown grossExchangesNot returns if same type and priceTax Bakers
Key facts at a glance, as set out in this guide.

Returns and refund liabilities: an example

An online retailer sells goods for 1,000,000 that cost 600,000. Its return rate for these products is 8%. Returned goods cost 5,000 to collect and refurbish, and some cannot be resold at full price.

Entries at the point of saleEntries at the point of saleRecord the saleDebitCreditDr Cash1,000,000.00Cr Revenue920,000.00Cr Refund liability80,000.00Record cost of salesDebitCreditDr Cost of sales557,000.00Dr Return asset43,000.00Cr Inventory600,000.00
Expected returns are recognised on day one, not when goods come back.
Amount
Revenue: 1,000,000 less 8% expected returns920,000
Refund liability80,000
Return asset: 8% x 600,000 less 5,00043,000
Cost of sales: 600,000 less 43,000557,000
Gross profit363,000

When goods are actually returned, the refund is paid from the refund liability and the goods come back into inventory from the return asset. At each reporting date, the retailer updates both for the latest return expectations.

How are return rates estimated?

From the retailer's experience by product category and channel, adjusted for current conditions, such as a new product line or a change in the returns policy. Revenue is recognised only to the extent it is highly probable there will be no significant reversal, so a new online category with uncertain returns may need a cautious estimate. Fashion and electronics bought online typically have the highest rates.

Can the refund liability and return asset be netted?

No. IFRS 15 requires the refund liability and the asset for goods to be recovered to be presented separately. The return asset is assessed for impairment, for example when returned seasonal goods will only sell at clearance prices.

Why do refund liabilities peak after the holiday season?

Retailers with a December year end carry high refund liabilities, because gifts bought in November and December are returned in January. Estimates need to reflect seasonal return rates, which are usually higher for gift purchases, rather than the year's average.

Who bears returns on marketplace sales?

For goods sold by third-party sellers on a retailer's marketplace, the seller normally bears the return and the retailer's exposure is limited to refunding its commission; see online marketplace revenue.

How are estimates updated at each period end?

By comparing actual returns against the estimate for earlier sales, adjusting the return rate for current trends, and remeasuring the refund liability and return asset. The adjustment goes to revenue and cost of sales in the current period.

How are exchanges and restocking fees treated?

  • Exchanges of one product for another of the same type, quality, condition and price, such as a different size, are not returns.
  • Restocking fees charged on returns are part of the transaction price for the goods expected to be returned, reducing the refund liability.
  • Store credit given instead of cash is a contract liability, like a gift card, until used.

What about faulty goods?

Returns of faulty goods under statutory or assurance warranties are not a right of return under IFRS 15; they are warranty obligations, provided for under IAS 37 when the goods are sold. Retailers often recover these costs from suppliers, which is a separate receivable.

What about sales taxes on returns?

Sales tax or VAT collected on goods expected to be returned is not revenue; it is refunded to the customer or reclaimed from the tax authority, depending on local rules. See retail accounting, variable consideration and gift cards.

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Questions people ask

How are returns accounted for under IFRS 15?

As variable consideration: revenue is recognised only for goods expected to be kept, with a refund liability for expected refunds and an asset for goods expected to be returned.

How is the return asset measured?

At the former carrying amount of the goods expected to be returned, less expected recovery costs and any loss in value.

Can the refund liability be netted against the return asset?

No. IFRS 15 requires them to be presented separately.

Are exchanges treated as returns?

Not when the product is exchanged for another of the same type, quality, condition and price.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 15Variable consideration and the constraint under IFRS 15RetailGift cards and breakageRetailRetail accounting: the key IFRS issues

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This guide is general information. It is not tax or legal advice for your situation.