Customer returns: Russian business habits and options for ERP systems

The way how company wants to address customer returns depends both on business practice habits and local legislation requirements.

Imagine a situation when your company is making a sale to a customer of some quantity of items at the sales price of 50 euro per item (skip VAT for simplicity). The actual cost of this items is 25 euro per item. You support your delivery with normal set of shipping documents, which are: way-bill (Russian analog of Western invoice) and a VAT invoice (which is a document that describes how much VAT there has been in a transaction). Then client identifies that some items are damaged or missing and would like to decrease the invoice.

I can identify several cases of how it can be done in terms of business processes and legislation requirements:

Customer identified damaged/missing items some time after the delivery

1. Regular customer return:
   • In case customer would like to physically and officially return items to your company and you would like to book it in your stock (e.g., you think you can still sell this items, or need to utilize them in a smart way), you would need to create and post a credit-memo that would contain those items as lines. Posting such credit-memo will return items in stock at their actual cost of 25 euro per item, and diminish your revenue, adjusting also accounts receivable for this customer. The difficulty here is that according to Russian legislation, you would need to provide to your customer so-called "Correction VAT invoice", which is a bit more complicated form of initial VAT invoice. It should contain the information about initial quantity and amounts, about corrective quantity and amounts, and about resulting new quantity and amounts in the initial shipment - by each item in the initial shipment.
   • If there is no need to return the items (e.g., they are missing or totally damaged or already utilized by customer, and you do not want to book them in your stock):
     • It is enough to create a credit-memo that would not contain items, but only financial revenue accounts. This will also adjust your revenue and accounts receivable for that customer, but you would still need to issue a correction VAT invoice, that would indicate which items were corrected, so ensure you will put sufficient description to the lines of credit-memo so you will have as less manual work as possible to correct this documents while printing them.
     • In case customer does not want to deal with correction documents, you can agree to leave the initial deal as it is, but you will provide a discount for the next order to compensate the difference. This is a lucky situation and you will just need to remember to give less sales price for the next delivery.
     • There is also another option, widely used in Russia. Parties just agree to rip the initial documents and print new ones. This is because many customers operate under local accounting 1C system that allows to make changes in the posted documents. As we are using normal ERP system, you would need to make an internal full credit-memo for all your shipment (no print forms is needed) and post a new one with less items, do not include the damaged ones. Print new shipping documents and provide them to your customer. Depending on your business case, the damaged items you will need to write-off from stock and utilize or you can further sale them with a discount to some other customer.
2. "Back-purchase" return. In this case your customer starts to act as a supplier, and sells the items back to you at the same price he had purchased it. You need to create a new supplier card and book a regular Purchase Order for the returning items. This type of return is widely used in Russia as it allows customers not to deal with correction documents and to easily return items without caring much about the periods or currency rates or whatsoever. Customer will provide you with his regular sales documents and feels happy. However this option leads to few inconveniences in your financial books:
   
   • The cost of those returned items will be now higher that actual. Since you had sold the items at the price of 50 euro per item, the same purchase price you will have when making this back-purchase. Thus, instead of initial 25 euro per item you will have it in your stock at the cost of 50 euro. You will not be able to easily adjust this stock value as by Russian legislation this is now the accounting and taxable cost of these items. You would need to do additional adjustment when preparing management reports based on GAAP or IFRS standards.
   • The revenue for this deal in your accounting books would also be artificially increased. You will book your initial sales and this revenue in accounting and tax ledgers would not be corrected as the return is made as a purchase from supplier. So it would look like you still sold everything and have revenue whereas in reality your revenue should have been less. Remember to do additional correction in your management reports for that as well.

Immediate identification of damaged/missing items by customer upon receiving the delivery

When customer identifies the items are damaged or missing within the acceptance of the delivery, there might be again several business options:

• Customer can reject the whole delivery. In this case you would need to book internally a full credit-memo and create a new sales order with a new set of supporting shipping documents, and then organize a new delivery.
• Customer can agree to accept full shipment, but receive a discount for the next shipment to cover the difference.
• Customer might partly accept the shipment and issue a special way-bill (TORG-2 form) that identifies the difference between your shipping documents and actual quantities. You would need to book a credit-memo based on this document, but this is rather a rare case in practice, as customers normally do not want to deal with creation of some documents during the delivery process.

Summary:

Usually you will face a need to follow such type of the return that is offered by your customer, as you for sure want to be customer-oriented :-). Depending on the case, you will need to adjust your company business processes and be ready at least to follow the legislation requirements for printing a special correction documents, that are part of Russian localization. Doing a "back-purchase" remember to make adjustments for management reports to provide correct figures for stock and revenue.