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02 June 2007 | 
The definition goes “Those principles, bases, convention, rules and practises applied by an entity that specify how the effects of transactions and other events are to be reflected in its financial statements.
I remember few years ago, there was difference of opinion between our Financial Controller and Sales Director on how to report sales of some items should be. The question was “how to report sales of 1 free item when the customer buys 5 items”. This is usually in retail business when you have schemes that promote customers to buy in large quantitative. The Sales Director was of opinion that this should treated as expenses whereas the Financial Controller said it is question net realisation for sales is less since the company invoices for 5 items but actually sells 6 items.
I have posed this question to many accountants at junior level and most often I have got the answer that the free item should be treated as an expense in profit and loss. The correct answer is to book that 1 sale in question as sales with zero value.
The other question is distributing free samples – How they should be shown in books. As far Indian Tax law is concerned, the seller has to bear the sales tax on these items. How ridiculous? The company is acting as agent to collect taxes … why it should pay tax? Just an increase in cost of sales without realising anything.
I came across an article in a
- Distiller sells maturing whiskey to bank with option to repurchase when ready for sale.
- Football club sells ground and continues to occupy ground on lease.
- Trade debtors sold to a factor, who then recovers cash from debtors.
Discuss and share your point of views.
Regards,
Santosh Puthran
AICWA
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2 comments:
Financial accounting is compacted into three vital concepts 1.Capital 2.Revenue 3.Deferred.
In this situation on alternative I.
Whisky probably is in work in process stage where inorder generate cash the Producer sells to a bank with a buy back option.The question is whether the physical custody is transfered to the bank/the process of maturing continues in the distiller place.In esssence it could be a loan against Work-in-progress.
If the process of maturing is independent or natural of a factory process then the physical whisky could have changed hands.Then it is simple transfering of risk of maturing and hence a sale at discount which will then be purchased at a predetermined price.
In the former case it could be a simple stock in trade and in the latter it could be a sale accounted at discount like a second sale.GAAP?
2.Lot depends on lease terms but if the sale is outright then one becomes a tenent and the ground a sale of capital asset.But if the lease terms take care for a discounting factor of prospective lease then it could be right of ownership transfer with restriction in usage by the new owner for a specified period which means the asset will appear as a lease hold in the books of the seller and money received would be shown as deferred revenue.adjustible against lease rent in future.
3.Discounted sale realisation.
The Accounting Standards of UK & Ireland address this as FRS 5 - Reporting the Substance of Transactions
http://www.frc.org.uk/asb/technical/
standards/pub0100.html
All the scenarios in MA blog is addressed by FRS 5.
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