If a customer places an order for goods they have taken delivery of before the year end and pays the invoice, but SUBSEQUENT to the year end cancels the order, returns the goods and is repaid by the client is this a post balance sheet event - adjusting or non-adjusting ??
Thanks.
Replies (8)
Please login or register to join the discussion.
What is the reason for the cancellation?
I'm surprised that a customer has been allowed to cancel an order at such a late stage at all. The fact that a customer seems to be able to unwind a transaction completely after paying the invoice throws your entire income recognition criteria out of the window.
The question is therefore why the customer was able to do this. In order for it to be an adjusting post balance sheet event, the unwinding of the transaction would have to be as a result of conditions that existed at the balance sheet date. There is not enough information in your query to determine if this is so. The only reason I can immediately think of for doing this is as a goodwill gesture to a good client. If that is the case, it seems likely that this decision would have taken place after the balance sheet date, hence not an adjusting event.
Are we talking about a material amount here?
Sale or return?
I would agree with the above. However, if the goods were sold on a sale or return basis, revenue should be recognised based on a reliable estimate of returns (if the goods are generally sold on that basis and a reliable estimate can be made) or all sales should be excluded until the contractual term for the return has passed. The goods should be shown as stock (but NRV may have been affected of course).
Sale or return seems unlikely
WHilst a remote possibility, sale or return arrangements are usually based on the customer only being invoiced and paying for goods as they are sold on. In this case, the goods have been fully invoiced and paid for before the transaction is unwound.
Agred but...
covering all the bases. After all this may be web based selling which would normally require payment up front.
As you said in your first post - not enough information! :-)
Post Balance Sheet Event
From the information given I'd say that there is no reason to adjust or disclose. The subsequent return of the goods and full reimbursement means that there is no loss on the deal and is not an adjusting event. The only effect of the original purchase is to convert cash into stock, an event which is reversed in the new year. The fact that the goods in question contributed nothing to profits seems to be academic to the process.
Apologies OP
For mixing up my debits and credits.
I think you're saying that as things stand at present there is a sale and a profit on that sale showing in the accounts but it will be extinguished in the new year?
If so, you could provide for a debtor (against purchases) for the refund from the supplier and provide for a creditor (against sales) for the refund from the customer. The effect would be similar to providing for known losses on a long term contract. It is usually good practice (and in line with accounting standards) to recognise losses as soon as they're known about.
Clarification please
In your opening post you said that the customer had taken delivery of the goods before the year end. Now you are saying that your client's supplier refused to supply the goods. These can't both be correct and which is right could have an effect on the treatment. If your client was unable to deliver on their part of the deal (because their supplier refused to supply the goods) then the income should not have been recognised in the first place. If an invoice was raised, this should have been put to deferred income (because your client does not have a inalienable right to it until they have completed their part of the contract) and this would then reverse in the new year when the contract was cancelled. In this case, the transaction would not hit the profit and loss account at all rather than this being an adjusting post balance sheet event.