In the Gleason Candy, Inc. case, two important issues are at hand. The company is not planning on recording a reasonable estimate for the right of return they will provide to their wholesalers and management does not have a reasonable estimable percentage determined. Recommendations for determining a reasonable estimation should be found by looking within the industry to examine competitors’ percentage for their returns, then deciding which percentage would be appropriate for Gleason Candy. Upon deciding which percentage to use, Gleason Candy management should implement and include the percentage in their financial statements with appropriate disclosure to the notes.
Gleason Candy’s year-end date is August 31. Twenty-five percent of their total sale volume revolves around Halloween, resulting in 30 percent of the net earnings of the company within the first quarter. Due to unfortunate incidents, wholesalers are demanding a right of return from the purchase of Halloween candy. Gleason Candy is conforming to these demands because their market will turn elsewhere for business if they do not agree to the demand. Gleason Candy has not offered a right of return after receipt by the wholesaler in the past, thus limiting the available historical data to draw upon for help in making the decision of an estimation. Management is increasing the price of all Halloween candy by 10 percent to cover any decrease in earnings due to returned sales. Currently, management does not plan on recording any estimation because of their lack of experience and the price increase of Halloween candy.
The issues of this case are a specific result of Gleason Candy offering a right of return to its wholesalers. Gleason Candy now is required to conform to GAAP by the FASB Accounting Standards Codification 605-15-45-1, which states, “for any sales made with a right of return in which the criteria in paragraph 605-15-25-1 are met, revenue and cost of sales reported in the income statement shall be reduced to reflect estimated returns” (FASB, ASC 605-15-45-1). The codification in addition addresses Gleason Candy management’s concerns regarding the absence of historical data and the experience in determining an estimate. These two concerns are addressed in 605-15-25-3-C and continue on into 605-15-25-4. 605-15-25-4 states, “The existence of one or more of the factors in the preceding paragraph, in light of the significance of other factors, may not be sufficient to prevent making a reasonable estimate.” Gleason Candy is not able to claim their concerns to be sufficient enough to prevent them from making an estimation.