1.12 Query
Booking of sales against F.O.R. destination contracts
1. A public sector company, consistent with the past practice, booked its sales against F.O.R. destination contracts on completion of delivery to the customers. The company has obtained a legal opinion which confirms that in such transactions property in the goods passes to the customers on completion of delivery to the transport carriers. The practice had not been adversely commented upon by the statutory auditors or CAG in the past. In this connection, the querist has mentioned that the company manufactures goods strictly in accordance with the customers specifications at specified consideration and appropriates the same to the customers with out any recourse by giving delivery to the transport carriers. The company has not yet experienced any return of goods by customers. The statutory auditors, audited the accounts of the company for the year 1984-85 and 1985-86. Although they did not qualify their report in this regard on the companys accounts for the year 1984-85, they did so in the year 1985-86 and their observations are as follows-
rofit & Loss A/c.
Total sales included a sum of Rs. 228.99 lakhs despatched on F.O.R. destination basis but property in which continued to remain with the Company as on the date of financial close. As a result, the sales and the profit as shown in the Account for the year have been higher by Rs. 228.99 lakhs and Rs. 72.88 lakhs respectively, with consequent under-statement of finished material in transit by Rs. 156.11 lakhs. This is as per practice consistently followed by the Company.
2.The above observation of the statutory auditors has been further commented upon by the Section 619 (4) of the Companies Act, 1956. In the comments of CAG, statutory auditors view has been corroborated except that consistency of practice as stated by the statutory auditors has not been mentioned. The companys views on the issue are as follows: -
(a) Property in the goods manufactured in accordance with the specifications of the customers passes when the goods are appropriated to the customers at the completion of the delivery to the transport carrier without any recourse. The companys contention in this regard has been corroborated by the legal opinion.
(b) Even if legal title does not pass to the buyer, sales are booked in the accounts on completion of delivery to the transport carrier, and, as such, companies both in the private as well as in the public sectors have been booking such sales in the accounts.
(c) Even if the property in the goods does not pass to the customers and sales cannot be booked on completion of delivery to the transport carriers, goods manufactured in accordance with the specifications of customers after appropriating to the buyer and completing delivery to the transport carriers, cannot be classified as a finished stock as contended by the statutory auditors.
(d) Since the practice has been followed consistently from year to year, the effect of such transaction has no material impact on the results of the company. Although admitted by the statutory auditors that such sales have been booked in accordance with the practice followed by the company, while quantifying the figures, the effect in the accounts under reference of similar transactions booked in 1984-85 has not been given.
3.The company also referred the matter of a firm of chartered accountants. In their opinion, there is nothing wrong in the existing practice followed by the company in this regard.
4.The querist has sought the opinion of the Expert Advisory Committee as to whether the booking of sales by the company on delivery of goods to the transporters, where the sales are made on FOR destination basis, is correct or not.
Opinion May 26, 1987
1.The Committee notes that paras 10 and 11 of Accounting Standard 9 (AS-9) on Revenue Recognition , issued by the Institute of Chartered Accountants of India, state as follows: 10. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.
11. In a transactions involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associate with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.
2.The Committee is of the view that the time of transfer of property in goods or transfer of all significant risks and rewards of ownership maybe different from the time of transfer of legal ownership. From the accounting viewpoint, transfer of property or transfer of risks and rewards of owner ship is a question of fact to be determined from the circumstances of each case.
3. Keeping in view the above, the Committee is of the opinion that, in the circumstances of the query, the company can book sales as soon as goods are delivered to the transporters for appropriation to the contract of sale, and if the company does not retain significant risks and rewards of ownership in the goods.
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