Accounting for installments and imputed interest

A company sells a product to customer who is paying in installments over 36 months.

Didn't find your answer?

Hi guys,

I am unsure about the accounting treatment about the following scenario: 

A company sells a product to customer, who pays a small amount (initial payment) at delivery. Then the remaining cost is paid through monthly installments for 36 months. The item's ownership is transferred to the customer at delivery. The total amount payable by the customer (initial payment + 36 installments) is not materially different from the standard market price of the product if buying outright.

The relevant standards are IFRS 15 and IFRS 9. The performance obligation is completed when product is delivered to customer, but because the revenue is collected over 36 months, there is an imputed intereste element that needs to be considered. This is the part that I'm not sure, because there is no clear guidance in IFRS 9 to state how this should be dealt with. Any suggestions are welcome! 

Assume, the standard alone selling price of the product is £4,000. The inital payment is £400. The monthly installment is £100 for 36 months. 

 

 

Replies (4)

Please login or register to join the discussion.

By johngroganjga
12th Sep 2018 13:10

Do you mean you don't know what calculations to do, or you don't know how to do them?

Thanks (0)
Replying to johngroganjga:
avatar
By xham
12th Sep 2018 13:24

Not mutually exclusive, but for arguments sake, both.

Thanks (0)
By johngroganjga
12th Sep 2018 13:42

Well first you need to select an interest rate. Then you discount the future cash flows to the present date using that interest rate. That present value of the future cash flows is the sales value that you book now. The difference between that and the future cash flows is the imputed interest figure you are looking for.

Thanks (1)
Replying to johngroganjga:
avatar
By xham
12th Sep 2018 14:20

Thanks John. It appears I have over complicated things in my head!

Thanks (0)