Deferred Revenue Asset

Some one had a unique marketing strategy of handing over brand new equipment to customers without selling it, requesting them to use it as a trial and purchase that equipment if they like it in their trial. I said impossible!!

Now it is possible like below and going to write my first recommendation to standard setters. I might get lucky and Revenue Recognition might include my suggestion.

Deferred Revenue Asset a/c Dr.

To Inventory Cr.

(When equipment is handed to the customer for trial)

Bank a/c Dr.

Revenue a/c Cr.

(When the customer agreed to purchase the asset and made payment)

COS a/c Dr.

Deferred Revenue Asset a/c Cr.

(To reflect the inventory closing balance)

Inventory a/c Dr.

Loss on trial Dr.

Deferred Revenue Asset a/c Cr.

(When the customer returns the product due to dissatisfaction)

The Loss on trial will be calculated as per days depreciation

Inventory is revalued at lower of: (Trial equipment)

Cost less wear and tear (Depreciation)

NRV less wear and tear (Depreciation)

Depreciation is not tax deductible. The returned trial equipment could be resold at an arms length transaction at a new mark-up or lowered selling price. :)

Your concept is pretty interesting and quite practical! Trial periods with equipment handed over without immediate sale do pose a unique challenge in revenue recognition, and your suggested entries capture the essence well.

Here’s a refined IFRS-based viewpoint and some additional thoughts for your recommendation:

1. Conceptual Understanding

When equipment is handed over for a trial with no obligation to purchase, it should not be recognized as a sale or revenue initially.
The equipment still belongs to the company, so it should remain on the balance sheet as inventory or fixed asset (depending on nature).
Your idea to debit a “Deferred Revenue Asset” account to reflect this trial allocation is innovative — but IFRS usually prefers no asset recognition other than Inventory/Fixed Assets for goods out on trial.
The “Deferred Revenue Asset” terminology might confuse with “Deferred Revenue” which is a liability. Perhaps call it “Trial Equipment Asset” or “Assets with Customer on Trial” to clarify it’s an asset, not a liability.

2. On Customer Acceptance

Upon customer acceptance and payment:
- Debit Bank (cash receipt)
- Credit Revenue (sales)
- Debit Cost of Sales (inventory cost)
- Credit Inventory/Deferred Asset account

This follows IFRS 15 revenue recognition — revenue is recognized when control transfers, which happens on customer acceptance.

3. On Return by Customer

When the equipment is returned:
- Debit Inventory (at lower of cost less depreciation or NRV)
- Debit Loss on Trial (expense)
- Credit Trial Equipment Asset (to reverse the asset held for trial)

Depreciation based on the trial duration is reasonable for estimating wear and tear. This aligns with the lower of cost or net realizable value (NRV) rule under IAS 2 Inventory.

4. Tax Treatment

You mentioned depreciation is not tax deductible. Correct, since the asset remains with the company during the trial, and tax depreciation generally applies to owned assets.
Loss on trial may be deductible depending on tax regulations, so this needs careful review.

5. Additional Suggestions

Add clear disclosure of such trial assets and any related risks.
Maintain proper tracking of trial equipment, trial duration, and condition on return.
Consider whether equipment trial affects warranty or liability terms.

Summary of Accounting Entries (Refined)

Event	Debit	Credit
Equipment handed over on trial	Trial Equipment Asset (or Inventory)	Inventory
Customer accepts and pays	Bank	Revenue
	Cost of Sales	Trial Equipment Asset
Customer returns equipment	Inventory (lower of cost less depreciation or NRV)	Trial Equipment Asset
	Loss on Trial Expense

If you’re submitting this as a recommendation to standard setters, clarifying these points and contrasting with existing IFRS principles (IAS 2, IFRS 15) will make your case stronger.