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Function documentationRights of Return

 

If your company expects to refund some or all of the amount of a sales item to a customer, you may have to specify an estimated percentage of the total amount and post it as a refund liability.

Performance Obligations Applicable for Rights of Return

Rights of return can be applied at performance obligation level. Additionally, the following restrictions apply:

  • Linked performance obligations are not allowed to have rights of return. A linked performance obligation is not an independent performance obligation. Therefore, the return of a leading performance obligation always results in the return of its linked performance obligations. The customer cannot cancel linked performance obligations without canceling the leading performance obligation.

  • Time-based performance obligations and percentage-of-completion performance obligations are not allowed to have rights of return.

  • Non-distinct performance obligations are not allowed to have rights of return.

  • One performance obligation can have up to one right of return.

Example Example

The following are some example scenarios of rights of return applied to performance obligations:

Performance obligation

Composition

Fulfillment Type

Right of Return %

1

Leading

Event-Based

5%

1a

Linked

Time-Based

Not allowed

2

Compound

Event-Based

10%

2.1

Non-Distinct

Event-Based

Not allowed

2.2

Non-Distinct

Event-Based

Not allowed

3

Distinct

Event-Based

Not specified

4

Distinct

Time-Based

Not allowed

5

Distinct

Event-Based

Not specified

5.1

Distinct

Event-Based

6%

5.2

Distinct

Event-Based

7%
End of the example.
Duration of the Right of Return

A right of return lasts for a specified period of time, which can be specified with combinations of the start date, the end date, and the duration time. Typically, the system supports the following two scenarios:

  • A fixed time period, with a start date and an end date

    This can be specified with a valid combination of start date, end date, and duration. For example, it can be specified with a start date and a duration.

  • Only a duration but no start date or end date

    This represents a right of return that lasts for a fixed length of time but has a variable start date. When part of the performance obligation is delivered, the right of return of the delivered part starts. If the performance obligation is delivered in several installments, the one right of return is actually split into multiple de facto rights of return, each starting from its own delivery date and lasting for the specified length of time.

Amounts of Rights of Return

The following amounts are relevant to rights of return:

  • Revenue Adjustment for Right of Return: right of return percentage * total recognized price

    This amount is also the amount that is recognized as revenue when the right of return expires.

For a leading performance obligation, the total recognized price also includes the recognized price of its linked performance obligations.

For performance obligations that have a sales bill-of-material structure, the right of return percentage applied on the higher-level performance obligation is automatically brought down to its lower-level performance obligations. If the lower-level performance obligations have their own percentages of right of return, the rights of return are calculated with those percentages respectively. The system tracks the revenue adjustment for rights of return at the lower level.

For a compound performance obligation that represents multiple non-distinct performance obligations, the right of return percentage is always applied on the compound performance obligation. This percentage is automatically distributed across its non-distinct performance obligations. The system tracks the revenue adjustment for rights of return at the non-distinct performance obligation level.

Changes Resulting from Contract Modifications

Modifications made to the revenue accounting contract can result in retrospective adjustments towards the recognized price, which is determined by the allocated price. The amount of the right of return is calculated based on the recognized price. Therefore, retrospective adjustments are also performed for the right of return.

Prerequisites

The system tracks the revenue adjustment and cost for right of return with two reserved condition types. Therefore, you must define these condition types in the following Customizing activity: Start of the navigation path Financial Accounting Next navigation step Revenue Accounting Next navigation step Revenue Accounting Contracts Next navigation step Condition Types Next navigation step Define Reserved Condition Types End of the navigation path

Activities

You can perform the following maintenance tasks for rights of return:

  • Manually add rights of return

  • Edit rights of return