In the Five Step Revenue Recognition process, Step Four requires that entities allocate the Transaction Price to each Performance Obligation (POB) based on its relative Standalone Selling Price. The Standalone Selling Price is the price at which the entity would sell a good or service separately to a customer.
Depending on the contract terms and conditions of a sale, products that have been sold by a seller to a buyer may have a potential Right of Return. The potential return of merchandise by a customer must be accounted for in accordance with GAAP (Generally Accepted Accounting Principles) whenever a buyer has a future Right of Return. This may be in accordance with formal or informal agreements between buyer and seller.
According to revenue recognition regulations, when a Right of Return exists, a seller may or may not be able to recognize all of the revenue at the time of sale.
