1.77 Query
Goods held by carting Agents can be treated as sales. 1A large pharmaceutical company has appointed carting agents and goods are handed over to them for onward dispatch to parties at different destinations through a certain number of transport firms. These supplies are made against valid orders. The ordered goods are packed on the basis of packing slip and delivered to the carting agents against invoices which form the basis of treating such dispatches as sales in our sales day book. 2.The carting agents hand over the LR/RRs, which are sent to collecting bankers along with a copy of the invoice for presentation to the parties for making payment. The LR/RRs obtained from the transporters are made “to self” and endorsement is made by the company in favour of the collecting bank. 3.There are cases in which parties have not retired the goods before 31st March (the last day of the financial year) and condition precedent for delivery of these goods is payment through bank. 4. One of the branch auditors has objected as under:
(a) The goods held by the carting agents despatched subsequent to the date of balance sheet should not be included in sales.
(b) Similarly the goods despatched prior to 31st March and the documents made as “to self” are not retired by the consignees prior to 31st March should also be treated as goods lying with the company.
The company has a wide net work of depots situated throughout India, and it will be virtually impossible to withdraw the entry regarding sales against documents through banks which are not actually retired by the parties by 31st March, “if it is to be considered that such goods actually belonged to the company and cannot be treated as sales”. We have also to take into consideration the commercial practice followed by all companies in this regards. Kindly advise.
Opinion October 13,1981
On general considerations, a transaction may be recognised in accounts as sale when- (a) No significant uncertainties exist regarding;
(i) the consideration that will be derived from the sale of the goods;
(ii) at the time of sale there is a reasonable expectation of ultimate collection; and
(iii) the extent to which goods may be returned; and
(b) the seller of the goods has transferred to the buyer the significant risks and rewards of ownership.
On the facts stated by the querists, it would appear that:
(1) the carting agents and the transporters, both act as the agents of the querists, and not of the purchasers of the goods in question, whereas the collecting banks act in turn as agents for both the parties to the sale;
(2) risk does not pass on to the buyer, under the terms of the contract up to the point of time at which the goods with the carting agents are delivered to the transporter. Accordingly, in the opinion of the Committee, goods held by carting agents, for which invoices are already raised and accounted for as sales, should not be recognised as sales at the year and i.e. 31st March. As regards goods despatched prior to 31st March in respect of which the documents made “to self” and endorsed in favour of the collecting banker which were not retired by the consignees on 31st March, the Committee’s opinion is as under:
(1) In drawing up the accounts of undertakings trading on terms whereby goods are supplied subject to reservation of title, it is necessary to decide at what stage they should be treated as sold by the supplier. In reaching this decision, it is considered that the commercial substance of the transaction of this nature has to be decided from considerations of all the surrounding circumstances.
(2) The circumstances surrounding the transaction may indicate that reservation of title is regarded by the parties as having no practical relevance except in the event of insolvency of the customer. The accounts of the seller would be distorted by the omission of such goods from sales and debtors, only on the ground that the legal title to the goods was acquired by the purchaser a short time after the “cut-off point for consideration”, namely the balance sheet date. Accordingly, in such circumstances, the goods may be treated as sales in the accounts of the seller.
(3) Precedents for the accounting treatment of goods supplied as sales by reference to the substances rather than for the strict legal form of the transactions already exist in, for example, hire purchase sales and in certain export sales which are often included in sales on despatch from the seller’s factory, even though legal title may not have passed.
(4) Where the accounts are materially affected by the accounting treatment adopted in relation to sales subject to reservation of title, the treatment should be disclosed in the balance sheet.
(5) Further, in accounting, a key criterion for determining when to recognise revenue from a transaction involving the sale of goods is that the seller has transferred to the buyer significant risks and rewards of ownership of the asset sold. If the seller retained significant risks of ownership, it is normally inappropriate to recognise the transaction as sale.
(6) Where only a non-significant risk of ownership is retained by the seller, this will not normally preclude the recognition of revenue, for example, when title is retained by the seller solely to protect the collectibility of the amount due.
(7) This also supports the view of the Committee that goods sent under documents made to self and endorsed in favour of the collecting bank can be treated as sales, as the risk involved is insignificant.
(8) However, if at the time of the annual closing, it is known to the querists that the purchaser has refused payment or failed to take delivery of the goods against payment within the time provided for under the contract, or in the absence of a specific time, for longer than the customary period of time for this to be done, the transaction should not continue to be treated as a sale in the accounts of the relevant year. __________________________ |