Page 160 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 2. Delivered subject to conditions
(a) Installation and inspection i.e. goods are sold subject to installation,
inspection etc.: Revenue should normally not be recognised until the customer
accepts delivery and installation and inspection are complete. In some cases,
however, the installation process may be so simple in nature that it may be
appropriate to recognise the sale notwithstanding that installation is not yet
completed (e.g. installation of a factory-tested television receiver normally
only requires unpacking and connecting of power and antennae).
(b) On approval: Revenue should not be recognised until the goods have been
formally accepted by the buyer or the buyer has done an act adopting the
transaction or the time period for rejection has elapsed or where no time has
been fixed, a reasonable time has elapsed.
(c) Guaranteed sales i.e. delivery is made giving the buyer an unlimited right of
return: Recognition of revenue in such circumstances will depend on the
substance of the agreement. In the case of retail sales, offering a guarantee of
“money back if not completely satisfied”, it may be appropriate to recognise
the sale but to make a suitable provision for returns based on previous
experience. In other cases, the substance of the agreement may amount to a
sale on consignment, in which case it should be treated as indicated below.
(d) Consignment sales i.e. a delivery is made whereby the recipient undertakes to
sell the goods on behalf of the consignor: Revenue should not be recognised
until the goods are sold to a third party.
(e) Cash on delivery sales: Revenue should not be recognised until cash is received
by the seller or his agent.
3. Sales where the purchaser makes a series of instalment payments to the seller, and
the seller delivers the goods only when the final payment is received: Revenue from
such sales should not be recognised until goods are delivered. However, when
experience indicates that most such sales have been consummated, revenue may be
recognised when a significant deposit is received.
4. Special order and shipments i.e. where payment (or partial payment) is received for
goods not presently held in stock e.g. the stock is still to be manufactured or is to be
delivered directly to the customer from a third party.
Revenue from such sales should not be recognised until goods are manufactured,
identified and ready for delivery to the buyer by the third party.
5. Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the
same goods at a later date.
For such transactions, that are in substance a financing agreement, the resulting cash
inflow is not revenue as defined and should not be recognised as revenue.
6. Sales to intermediate parties i.e. where goods are sold to distributors, dealers or
others for resale.
Revenue from such sales can generally be recognised if significant risks of ownership
have passed; however in some situations the buyer may, in substance, be an agent
and in such cases the sale should be treated as a consignment sale.
7. Subscriptions for publications: Revenue received or billed should be deferred and
recognised either on a straight line basis over time or, where the items delivered vary
Contd...

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