Revenue Recognition on Trade

When (if ever) is it allowable to recognise only the mark-up on a transaction as revenue.

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Dear all,

A question please that has come up in our business, note we use IFRS. 

We have been asked by a customer to provide a trade service that is not necessarily our typical day to day business. In essence, a customer wants to buy some machinery from us, which is a mode of business we typically do not do.

It will work as follows : we raise an invoice to the customer for the full cost of the machinery to us plus a small margin (say 5%), the customer pays that invoice 100% in advance, we will then pay the supplier based on their invoice to us, and the supplier will ship the machinery direct to the customer with our role just relationship management and ensuring all goes smoothly.

My question relates to revenue recognition : I recall when we did this back in the late 2000s for a different company it was mandatory that despite our very 'light touch' involvement we needed to recognise our full invoice value (ie our supply value + margin) as revenue and the full cost of the equipment as a cost. Given that this was not our typical business it distorted what our accounts looked like, overall revenue/margin levels etc.

I'm just wondering with IFRS 15 coming in, is this still the case? Ultimately if we asked the supplier to invoice the client direct and then just raised our invoice being only the margin (which from a practical standpoint is very similar to what is occurring though there are arguments about where risk lies etc) then the revenue would be only the margin, so is there an argument that we only book the margin as the revenue? Does the fact it is not our typical day to day business make a difference? 

Thanks

 

 

 

 

Replies (8)

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Stepurhan
By stepurhan
04th Mar 2024 11:58

A transaction that "is very similar" to another one is different from them being the same.

The fact is the supplier is invoicing you, and you are invoicing your customer with a mark-up. That distorts your figures because it is a matter of fact you took part in a transaction that is significantly different from your normal business.

Which raises the question why are you doing this transaction at all? Assuming there is a good reason for that (good customer relations possibly), why aren't things being arranged the alternative way you suggested that would take the machinery purchase and sale out of your accounts?

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Replying to stepurhan:
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By mugello
04th Mar 2024 13:49

Thanks for the response... regarding your question we typically do equipment hire but for a couple of reasons the client wants to purchase equipment in this case (mostly they hire/rent from us as per our typical business activity). Why the client wants to buy from us... it is a strong relationship but ultimately their reasons are theirs.

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Replying to mugello:
Stepurhan
By stepurhan
04th Mar 2024 15:55

mugello wrote:
Why the client wants to buy from us... it is a strong relationship but ultimately their reasons are theirs.

My question isn't why the client wants to buy from you. The question is why you agreed to buy machinery for them when that isn't what your business does.

Because that is what is creating your problem. Telling your client you only do hire, but offering to assist them in finding a suitable supplier, would have solved the problem. The only fee you would have needed to account for was your fee for providing. that assistance, since you would never have purchased the machinery.

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By paul.benny
04th Mar 2024 12:20

There are huge contractual differences between purchase and resale and earning commission - liability, warranty, risk of payment default to name just a few. Unless you have offloaded all of those onto supplier and/or customer, this is revenue.

There might be an argument for reporting the margin earned under other operating income. I would support this for incidental revenue - eg scrap sales but this sale seems too close to your regular revenue stream.

And for reference
- IFRS can be downloaded from ifrs.org (can a bit tricky to find the free downloads)
- PWC model accounts under FRS102 and IFRS contain lots of useful guidance
Both require free registration.

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By richard thomas
04th Mar 2024 16:04

I'm not suggesting there is anything amiss here, but I have had judicial experience of many MTIC fraud cases where a common ploy is to find a patsy (B) to act as a buffer between the dodgy supply by A to C, or A to D, E, F and G, with all the intermediaries being buffers. B is rewarded by a small mark up. One of HMRC's most convincing arguments in the highly expensive trials in order to show that B "ought to have known" there was tax fraud in the chain was that neither A nor C had any convincing commercial reason to give B a slice of the action.

If HMRC get their teeth into a scenario like this, they can be expected to shake it like a Bully XL - and they have several seriously unpleasant weapons at their disposal, like denying deduction for input tax. They would have expected you to have done due diligence especially on the seller to you.

I reiterate that the overall transaction may well be completely innocent, but you should perhaps be aware of what might happen should HMRC take a different view, and be prepared to justify your role in the transaction.

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Replying to richard thomas:
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By mugello
04th Mar 2024 16:32

Thanks Richard - client is a reputable multinational and is outside the UK but appreciate the heads up.

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Replying to mugello:
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By FactChecker
04th Mar 2024 18:56

Just to be clear, my reading of Richard's 'warning' is not entirely assuaged just because your client is "a reputable multinational and is outside the UK" ... it's more that you're putting your company in HMRC's cross-hairs and raising flags to draw their attention. Trouble doesn't only afflict the guilty.

FWIW your point about the client being outside the UK just increases the number of ways in which trouble could be lurking behind the bushes ... and there are other possibilities unrelated to Tax of any sort (such as your client purchasing items that your supplier would have refused to sell to them direct - for whatever reason).

So as stepurhan said above:
"The question is why you agreed to buy machinery for them when that isn't what your business does?"
From a purely pecuniary perspective, 5% seems unlikely to cover your costs when nothing goes wrong ... so if anything is questioned, it doesn't look attractive to me.

I realise this is not answering your core question, but that seems at best to be a question based on making life unduly complicated (and potentially dangerous).

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Replying to FactChecker:
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By paul.benny
05th Mar 2024 13:08

FactChecker wrote:
... and there are other possibilities unrelated to Tax of any sort (such as your client purchasing items that your supplier would have refused to sell to them direct - for whatever reason)...

One of those reasons *might* just be that goods are subject to export controls. For dual use goods, it's not always obvious. Might be worth specifically checking with Supplier.

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