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Hi Kishan/
Kashif.
Revenue should be
recognised when (IAS 18):
1. significant risks and rewards of
ownership are transferred to the buyer;
2.
managerial involvement and control have passed;
3.
the amount of revenue can be measured reliably;
4.
it is probable that economic benefits will flow to the enterprise; and
5.
the costs of the transaction (including future costs) can be measured
reliably.
Taking off from
Kishan's narrative and Kashif's insights on inventory treatment, it seems
that real ownership (such as that provided in condition #1 above) is not yet
with the buyer until the item is physically in his possession
(Kashif's insight on separating stock from inventory).
Further, managerial involvement and control over inventory have not passed
on to the buyer yet because Kishan's company still needs to monitor and
store the inventory set aside for the said buyers. On the other hand,
the amount of revenue can be measured reliably because the
company can collect immediately from the invoice issued (thus the revenue
measure), and the economic benefit. This satisfies several
conditions above.
The question
really is on what basis do you recognize revenue? If you practice cash
accounting, it seems you are properly recognizing revenue. If
you practice accrual accounting, then I would suggest you look at the
following.
1. You may
have measured the cost of sale, but the company really hasn't sold anything yet
because to recognize revenue, the significant risk and ownership should transfer
to the buyer, which based on the narrative may not be so (i.e. keeping of stock,
probable choice of buyer to select a fresh lot of items, etc.) unless transfer
of ownership is explicit and loss or damage of the items transfer to the
buyer upon invoicing (which should probably be covered by
contracts).
2. Relating
it to matching of costs and revenues, and taking Kashif's insight further,
if the buyer can choose "fresh" items and the company cannot sell the
items previously set aside for the buyer to the same buyer, actual costs may not
be matched against revenues received because it would seem that the majority
cost (cost of sales) of the sale is incurred and can only be measured properly
upon the decision of the buyer.
3. The
company would be exposed to tax issues. You would be recording revenues
that do not match costs actually incurred due to the choice of the buyer and may
pay either over or understated taxes. I wouldn't know your tax laws so
this is purely an assumption.
4. Lastly, the company will need to address physical
inventory issues. The items segregated are not consigned, and the
company cannot say that these items are not owned by them, unless an agreement
states otherwise.
I think
that a way to address this issue on recording revenue would
be:
1.
Upon collection, record the receipt as a payable to the buyer instead of
revenue, as a non-trade payable. You may maintain an
AP subsidiary ledger for this.
2.
Upon notification by the buyer of his intent to obtain the item,
prepare an entry to record the sale, debiting AP-Non Trade.
3. Of
course, the corollary entry to record cost of sales will follow (on a perpetual
inventory method). Because you know the lot from where the item was taken,
proper matching of costs and revenues will ensue and you will have less exposure
to tax and inventory obsolesense.
On inventory
concerns, I think that it all boils down to carrying cost and opportunity to
manage inventories better. I believe it would make
better business sense to not just set the said items aside because unless the
order came, the items will waste away in storage incurring additional carrying and maintenance cost, as well
as obsolesence, unless these are high-turnover items. If the
company initally treats these items as theirs, (ensure though that proper
safety stock level is monitored), they have better hold of planning stock
levels, managing inventory lots, and ensure that items received by their
customers are relatively fresh, and even avoid charging additional
differential prices adding better value to the services thay
provide.
Hope this
helps.
Regards, Ritchie A. Arceo
-----Original Message----- From: Kashif Marvi [mailto:[EMAIL PROTECTED]] Sent: Tuesday, October 08, 2002 5:22 PM To: Kishankumar Solanki; [EMAIL PROTECTED] Subject: Re: Audit of Inventory - Accounting for Invoiced Items (moneycollected) but not delivered
"MMS <caltex.com>" made the following |
