Payables Ledger Question

recognising PO liability [hypothetical question]

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I enter a PO into the the Procurement app, (say SAP Ariba).  Say its a ship I am buying for 650m usd.  I have negotiate and agreed the contract and terms.  I will buy a ship and pay when I take delivery. (ie something significant for the purpose of making a point).

So, 1st Jan I raise a PO and the liability is recorded in the Payables Subledger (Ariba).  I have a contract and liable to pay for the ship when complete. Feb, Mar, Apr, May go by and the supplier doesn't give me anything to Goods Receipt or send any invoice for stage payment, so no GRN or Invoice is entered and nothing goes through to the General Ledger.  So all this time I don't have anything in my General Ledger to recognise I have committed to buy this ship.  There will not be anything on my balance sheet to recognise the liability.  

Say during this time I am using my Balance Sheet to show the bank I am good for a new loan, or to investors that the business has a sound capital situation.  Then 2 days later the ship is delivered/GRN'ed and 650m usd liability appears.

Its a hypothetical question, I am just interested to find out how payables subledger items should be reported.  Maybe its my thinking thats wrong, I am basing it believing a contract when agreed is a commitment.

 

  

 

Replies (12)

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paddle steamer
By DJKL
12th Feb 2024 18:06

What form of accounts are prepared?

See 2.7 etc below in FRS102 re recognition though doubt at £650m the entity reports under FRS102.

I would not be adjusting the purchase processing ledgers, I would adjust, if needed by way of journal in Ye working papers or by note to accounts if no asset recognition actually required.

https://media.frc.org.uk/documents/FRS_102_The_Financial_Reporting_Stand...

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Replying to DJKL:
RLI
By lionofludesch
13th Feb 2024 10:15

Ye Olde Working Papers, forsooth.

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DougScott
By Dougscott
12th Feb 2024 20:02

It would be fraud if you didn't reveal such a liability to banks or investors.

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Replying to Dougscott:
John Toon
By John Toon
13th Feb 2024 10:22

Would it? I don't know many banks or investors who are that interested in what the PO book looks like. It certainly wouldn't appear in any management accounts and the only place something like this might appear would be in the stats as a disclosure note for capital commitments. Unless the company can't get out of the contract in which case you've got an accrual for $650m but there's usually enough vagueness in contracts like this to avoid accruing for costs until later down the timelines

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Replying to johnt27:
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By Abcurtis
13th Feb 2024 12:56

interesting you say "Unless the company can't get out of the contract in which case you've got an accrual for $650m", as others have said it would be a commitment not a liability but it the contract is tight maybe saying "you have to pay regardless of delivery" then you say the company would need to accrue for it.

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Replying to johnt27:
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By Abcurtis
13th Feb 2024 12:56

interesting you say "Unless the company can't get out of the contract in which case you've got an accrual for $650m", as others have said it would be a commitment not a liability but it the contract is tight maybe saying "you have to pay regardless of delivery" then you say the company would need to accrue for it.

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By WhichTyler
12th Feb 2024 21:17

Aren't the financial liability and the physical asset both contingent liabilities/assets at the BS date and to be reported as such? (The 'uncertain future event' is the delivery of the ship which is outside the purchaser's control)

Contingent liability:

a possible obligation depending on whether some uncertain future event occurs, or a present obligation but payment is not probable or the amount cannot be measured reliably
Contingent asset:

a possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

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By johngroganjga
13th Feb 2024 09:23

I agree that the liability is a contingent one, not an actual one. Therefore, it may need to be disclosed but it does not appear as a liability in the balance sheet.

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Replying to johngroganjga:
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By Abcurtis
13th Feb 2024 09:53

so although we have signed a contract/PO which I would say sets up a legal contract to buy something, it's still a contingent liability because it is not know if the contract will be performed.

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Replying to Abcurtis:
By johngroganjga
13th Feb 2024 10:14

Essentially yes.

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By [email protected]
15th Feb 2024 09:40

Surely it should only be recorded as a liability in the balance sheet when the liability actually crystallises - that would normally be on delivery but could possibly be on order placement if the obligation to pay was no longer contingent at that point

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By ASF
15th Feb 2024 15:53

Interesting - not sure I'd agree to build you a $650m "anything" without some up front money and stage payments tied to measures of work towards completion. Probably have to agree to some kind of "vesting" in return, for you, but ignoring the "commercial niceties", I think I agree about the contingent liability and whilst I also understand someone's comment regarding treatment in management accounts, this feels like the one place where the potential impact of the transaction needs to be abundantly clear IMHO, even if the financial statements, don't have the Balance Sheet showing the potential future impact at the time of order placement. As ever, the treatment will have to reflect the fact that the devil will more than likely be in the detail.

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