Returns reserve

Returns reserve: A returns reserve is an amount held back from current-period royalty payments to account for expected future returns. The licensor allows the licensee to hold back a percentage of royalties to avoid paying royalties on units that may be returned and refunded. The reserve trues up over time as actual returns post.

Returns reserves are common in wholesale apparel where retailer returns post months after the original sale. A 5–10% reserve is typical depending on the licensor.