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Revenue Recognition

Capital Goods - Revenue Recognition

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When can you recognise the sale of capital goods? Sometimes a customer will have paid for the asset in full after receiving our invoice but then simply not made collection for whatever reason, meaning the completed goods are still sitting in our premises? The trailers have all been PDI'd and ready for collection. There is a signed sales order contract in place.

We also have situations as above, but the goods have still not been paid for at the point of delivery ? Not sure where the risks and rewards lie here, I suppose in this case it is with us if we were to deliver without having been paid. Of course we would only allow this after considered discussions/ large well know customers

Is the receiving of payment from the customer the crux of the matter, with the caveat of my initial question?

Is there a clear set of rules for revenue recognition and cut off I can refer to?

Thanks

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By tom123
04th May 2021 15:20

Well, in the end it comes round to contract law.
But, generally, I would recognise the sale at the point of delivery - even if commissioning etc comes later.

With regard to recognising the sale prior to delivery - I would generally be reluctant to do that.

In a previous life (vehicle conversions) we fell into the trap of recognising the sale when the vehicles were (and I shudder) "mechanically and electrically complete".

All that happens is that you are 'borrowing' future sales more and more.

Your management will have a view, possibly driven by external factors or banking etc, but I would try and be firm about not recognising sales until the goods have left.

I only make an exception (here) when goods are packed in shipping containers and awaiting loading.

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By paul.benny
04th May 2021 15:30

Quote:

Well, in the end it comes round to contract law.

Tom, with respect, it doesn't. FRS102 para 23.11 deals with that very point.

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By tom123
04th May 2021 15:40

This is why you are in practice, Paul, and I spend my time making stuff instead - or at least reporting on people that do.. :)

My contract point was more heading towards getting customers to pay deposits, final payments etc.

Don't under estimate the wishes of directors of distressed companies, (who may be your employer..) to want to pull revenue forwards as well.

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By paul.benny
04th May 2021 15:52

Quote:
This is why you are in practice, Paul

Offended!

I left public practice almost immediately after qualifying, which was well before the end of the last century.

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By paul.benny
04th May 2021 15:26

Quote:
Is there a clear set of rules for revenue recognition and cut off I can refer to?

Yes - FRS102 if you're reporting under UK GAAP.

The key test is whether the significant risks and rewards of ownership have transferred. It's not easy to argue that has taken place if goods are still on your premises and have not been paid for.

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By Navola
04th May 2021 16:25

Thank you for all of your points so far. Yes I now work in an environment where keeping the bank and other 'funders' happy has meant the Directors bringing sales forward . I have discouraged this, actually stopped it much to the consternation of my colleagues as I believe that the risks and rewards have not been transferred to the customer if the goods remain in our premises.
Armed with your responses, I feel confident that I am doing the right thing!! Thank you

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By tom123
04th May 2021 16:32

I have been in your shoes (some years ago).

Everything is fine, until it isn't.

The company is only fooling itself.

Your bank (or whoever) will want to know how sales in month 1 did not turn into revenue in month 2.

There will be awkward silences when it is revealed that the sales items are in fact still in the compound - when the bank 'business support' people come for a visit.

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By Navola
04th May 2021 16:43

Yes I know what you are referring to!!

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Replying to paul.benny:
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By Navola
04th May 2021 16:42

Hi, what about if the goods have been paid for but simply not collected?

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Replying to Navola:
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By Navola
04th May 2021 16:48

Are we saying (or FRS 102 interpretation) that even if payment has been received, the fact that the goods have not been delivered means we should not recognise the sale?
If Yes, then this will lead to some 'interesting conversations back here at base camp!!
Thanks once again.

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By paul.benny
04th May 2021 16:55

You can probably take the revenue if the customer is arranging transport and if customer is installing

A bit more tricky if you arrange transport (if carrier isn't coming until next week, are the goods actually finished?). And if you have costs to install/commission, maybe you should defer a portion relating to an installation charge.

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By tom123
04th May 2021 17:43

In my current life (very much different to the example I gave above) we defer 10% until commissioning is complete, regardless of whether we have 100% payment or not.

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By paulwakefield1
05th May 2021 08:57

As mentioned above, have a look at FRS102 and specifically 23.10 to 23.13 and the 23A appendix of examples. 23A.3 may be specifically at point.

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By Duggimon
06th May 2021 10:25

One way of determining whether revenue ought to be recognised could be to consider what will happen to payment if nothing happens with the goods.

If the customer has paid but decides not to collect the goods or accept delivery, can they have their money back? If they have not paid and do nothing to collect the goods, does your company have legal recourse to collect the sale price and impose the goods on them?

If the money in both cases is already yours regardless then it would seem the test in FRS 102 s23 has been met and the only consideration should be if the payment is owed but not received, is it recoverable?

If not and the sale remains uncertain, the significant risks and rewards are still yours and there's no sale.

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By [email protected]
06th May 2021 13:05

Contract and FRS102 are in point and interract
When does risk and title pass?
at least you're dealing with goods rather than, say a long term project...

If in doubt I ask myself the following
"If the place burned down who's insurance would be liable for those items"
Acts a a good litimus test

"borrowing from the future" only ends in tears as it will eventually catch up so stay strong on your assertions. (oh and can wreck your debtor days!)

Whatever you decide, document it. Revenue recognition is something auditors will look at.

I would recognise once delivered / collected

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