POLICY NUMBER: PAGE: DATE ISSUED: DATE EFFECTIVE: APPROVED BY: JURISDICTION AFFECTED: 9.02 1 of 11 December 1996 (Revised - June 2000) December 31, 1996 Corporate Controller All
TITLE: RECOGNITION OF SALES RETURNS ____________________________________________________________
I. Background Coty Inc. and many other fragrance and cosmeticscompanies have policies that generally allow retailers to return goods under certain circumstances. The amount of returns varies widely throughout the business due to variations specific to individual countries, distinct business practices, and the varying nature of the products sold. However, creating uniform criteria for estimating an adequate reserve for a return is critical to ensuringconsistent reporting across the business. The diversity of the business and the growth through acquisition has led to a variety of return practices worldwide. Additional variables which increase the complexity of calculating the accrual for returns are the seasonality of certain parts of the business, changes in consumer preferences, and the potentially extended time period over which returns may occur.This policy puts forth a concrete path for the businesses to follow, therefore allowing the Company to properly account for sales returns. II. Purpose This policy will incorporate the different types of sales, basic/normal and promotional/seasonal, and set forth uniform parameters for calculating the returns accrual. Additionally, it will address the refurbishment of returns and, where applicable,the value of product put back into inventory (Cost of Goods Sold Credit). III. Policy A. Overview Due to the nature of Coty Inc.’s business, a significant portion of sales may be subject to returns. This is especially evident in the segments of the business which are highly reliant upon sales from the Christmas selling season, as well as other promotional events throughout the year. To understandand manage returns, they should be separated into two discrete categories - Basic/Normal Sales Returns and Promotional/Seasonal Sales Returns - and be analyzed independently based upon these two primary types of business. Furthermore, sales returns may be further broken out by product type (e.g. skin, color and fragrance), which will vary based on local market conditions.
Policy 9.02, Page 1The overall approach to effectively estimate Coty Inc.’s returned goods accrual requires incorporating the knowledge of the brand’s or SKU’s returns history and position within the product life cycle coupled with the current year sell-in level to the retailer. When data is available for certain significant promotions (i.e., Christmas selling season), sell-through information should be obtained,if possible, to understand the success of the promotion and whether or not there has been a significant change versus prior returns history. This is particularly true if the promotions will be crossing a quarter-end or year-end. The sell-through data will help to verify the reserve’s adequacy. The balance sheet amount of the returns reserve should represent the value of sales to retailers whichhave already been recorded on the income statement which are expected to be returned at any point in the future. The adjustments to the balance sheet reserve are to reduce the reserve when actual returns are processed and to increase the reserve when sales are made. B. Basic/Normal Goods By its nature, the basic goods business has a lower return rate than the promotional business. However, care andjudgment must be exercised to properly match the returns to the sales period in which they occurred, as there is often no mechanism (SKU) to distinguish one year’s sales from another (i.e., the same SKU is sold from year-to-year). Therefore, when lacking other data, a convention should be applied on a consistent basis whereby returns received during the next sales cycle after the balance sheet...