Reference no: EM13566522

Revenue recognition, when the right of return exists, was standardized in 1981 by SFAS No. 48. Prior to this, SOP 75-1 provided guidance but was not mandatory (which is why the FASB has brought various SOPs into the accounting standards themselves). As a result, three methods were widely used to account for this type of transaction: (1) no sale recognized until the product was unconditionally accepted, (2) sale recognized along with an allowance for estimated returns, and (3) sale recognized with no allowance for estimated returns. SFAS No. 48 mandated revenue recognition for such sales subject to six conditions: (1) price is substantially fixed or determinable at sale date; (2) buyer has paid or is obligated to pay the seller, and payment is not contingent on resale of the product; (3) buyer's obligation would not be changed in the event of theft or physical damage to the product; (4) buyer acquiring the product for resale has economic substance apart from the seller; (5) seller has no significant obligations to bring about resale by the buyer; and (6) future returns can be reasonably estimated.

Required:

a. Discuss the underlying conceptual issues concerning revenue recognition when the right of return exists. Can any (or all) of the pre-SFAS No. 48 methods be justified?

b. Indicate the rationale for each of the SFAS No. 48 tests before a revenue is recognized.

c. Is SFAS No. 48 an example of finite uniformity or of circumstantial variables as developed by Cadenhead?

d. Discuss the role of future events in SFAS No. 48.