Retail: inventory, returns and loyalty points

Cedar & Pine Home Store sells homewares from two shops. In October its tills record 240,000 of sales, all paid by cash or card. Three things make a retailer's month different from a service business's month.

1. Shrinkage. Cedar & Pine runs a perpetual inventory system: every sale relieves inventory at cost, so the ledger always shows what should be on the shelves. The month-end count shows what is there. The difference — theft, damage, miscounted deliveries, scanning errors — is shrinkage. It is written off to cost of sales because it is a normal cost of selling goods in shops (IAS 2.34 requires write-downs and losses of inventory to be expensed in the period they occur). Retailers watch shrinkage as a percentage of sales; a sudden rise is a control red flag, not just a number.

2. Returns. Cedar & Pine gives customers 30 days to return goods for a full refund. Under IFRS 15 a right of return is variable consideration: the store recognises revenue only for the goods it expects to keep sold, and a refund liability for the cash it expects to give back (IFRS 15.B20–B27). It also stops treating the cost of the goods it expects back as an expense: that cost becomes an asset — the right to recover the goods — until they come back. Recording full revenue and waiting for refunds overstates October's revenue and profit.

3. Loyalty points. Members earn 1 point per 10 spent; each point is worth 1.00 off a future purchase. Points give the customer a material right — something they would not get without buying — so they are a separate performance obligation (IFRS 15.B39–B43). Part of the price paid today belongs to the future discount. The store allocates the price between goods and points in proportion to their stand-alone selling prices. The stand-alone price of a point reflects the likelihood it will be redeemed: if 80% of points are expected to be used, 5,000 points are worth 4,000, not 5,000. The amount allocated to points is a contract liability, recognised as revenue when points are redeemed (or expire).