Managing Year-End Inventory Returns under IFRS
How should we handle inventory that was purchased prior to year-end but physically returned after? According to IFRS guidelines, do we need to make adjustments to the current year’s financial records, similar to how we treat sales with a right of return? This balance is significant, so clarity on the matter is crucial.
One response
Under IFRS, handling inventory that was purchased before year-end but physically returned after year-end requires careful consideration. The key principle to apply here is the recognition of the transaction based on the appropriate cut-off date and the associated economic realities.
Recognition of Inventory and Expense: If the inventory was purchased and recorded before year-end, it must be considered an asset of the reporting entity. However, if the inventory is physically returned after year-end, this indicates that the transaction is not completed, and an adjustment may need to be made.
Materiality Consideration: Since you mentioned that the balance is material, you should also consider the impact on your financial statements. Material items typically require careful Accounting treatment and disclosure.
Derecognition of Inventory: You should derecognize the inventory in the current period if the return is probable and you have a reasonable expectation that the goods will be accepted for return. This derecognition will affect both the cost of goods sold and inventory balances on the balance sheet.
Right of Return Accounting: Similar to sales with a right of return, if your company has a return policy or understanding with the supplier that makes returns probable, you can recognize this in your financial statements. This may involve estimating what inventory will be returned and adjusting the inventory and cost of goods sold accordingly.
Disclosure: Depending on the materiality and the nature of the adjustments, you may also need to disclose the nature and effect of the inventory returns in the notes to the financial statements.
To sum up, you will likely need to adjust your current year books to reflect the returns, similar to handling a sale with a right of return. It may also be prudent to consult with your auditors or a professional accountant to ensure compliant treatment under IFRS and to assess specific details of your situation.