Entities sometimes charge customers a “restocking fee” when a product is returned. Restocking fees typically are charged to compensate entities for various costs associated with a product return, such as shipping costs and repacking costs. Restocking fees also may be charged to compensate an entity for the reduced selling price that an entity may charge other customers for a returned product.

The staff thinks that the restocking fees for widgets expected to be returned should be included as part of the transaction price when control of the widgets transfers. The staff also thinks that a returned product subject to a restocking fee is no different than a partial return right and, therefore, should be accounted for similarly. That is, the staff thinks that a restocking fee should be included in the transaction price if an entity is entitled to that amount, regardless of whether that amount is explicitly stated as a restocking fee in the contract or the entity offers its customers less than a full refund for product returns in order to compensate the entity for various costs associated with a product return.

For example, Entity enters into a contract with Customer to sell 10 widgets for $100 each. The cost of each widget is $75. Customer has the right to return a widget but will be charged a restocking fee of 10% (that is, $10 per widget). Entity expects to incur restocking costs of 5% (that is, $5 per widget). Entity concludes that, due to the existence of a return right, the consideration promised in its contract with Customer includes a variable amount. Entity uses the expected value method for estimating the variable consideration and estimates that 10% of widgets will be returned and that it is probable that returns will not exceed 10%. Entity expects that the returned widgets can be resold at a profit.

In this case, Entity would recognize revenue of $910 [(9 widgets expected not to be returned * $100 selling price) + (1 widget expected to be returned * $10 restocking fee)] and a refund liability of $90 [1 widget expected to be returned * ($100 selling price – $10 restocking fee)] when control of the widgets transfers to Customer.