1.21 Query
Booking of sales against F.O.R destination contracts.
1. The querist has sought the opinion of the Expert Advisory Committee with reference to the query and the opinion of the Committee published in the December, 1987 issue of ‘The Chartered Accountant’, on the subject of booking of sales against F.O.R. destination contracts, in respect of the following facts pertaining to a private sector company:-
(i) Goods against F.O.R destination contracts (custom built) are manufactured strictly in accordance with the costumers specifications. The inspection clearances are issued by the customers to signify their acceptance of the specifications of the goods conforming to the approved drawings in terms of the purchase order. Such inspection is carried on either at the manufacturer’s premises or at the customers’ premises on receipt of goods depending on the nature of goods.
(ii) Goods are dispatched to the customers through the private transport carriers appointed by the manufacturer and the transit insurance cover is taken by the manufacturer as per the terms of the contract.
2. In the private sector company referred to above, sales are booked against F.O.R destination contracts only when both deliveries are effected and inspection clearances from the customers are obtained before the close of the accounting year, ignoring deliveries not backed by inspection reports on the basis that the significant risks and rewards of ownership have not passed to the buyer.
3.The querist has also informed that insurance cover is taken by the seller.
4. The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above:
(i) In case of an F.O.R. destination contract, the goods are delivered to the private transport carrier appointed by the manufacturer before the close of an accounting year but the goods are inspected subsequent to the close of the accounting year by the customer (evidenced by inspection report). Whether such deliveries can be booked as sales in the year of delivery. Custom built contracts do not generally call for return of the goods but the defects noticed on inspection are rectified at manufacturer’s cost.
(ii) In case the above deliveries can be booked as sales in the year of delivery, as a corollary, such deliveries should also be booked by the customers as purchases in their accounts, when in many cases the buyers have not received the goods and in some cases do not even have knowledge of such dispatches, how, under such circumstances these can be booked as purchases (there is sometimes a gap of 2/3 months between the date of delivery and actual receipt of goods by the manufacturer)?
Opinion September 7, 1988
1. The Committee notes that paras 10 and 11 of Accounting Standard 9 on ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, recommend as below:
“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 transaction 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 associated 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. From the facts of the query, the opinion of the Committee on the issues raised by the querist in para 4 of the query, is as follows:
(i) 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 may be different from the time of transfer of legal ownership. From the accounting point of view, transfer of property or transfer of risks and rewards of ownership is a question of fact to be determined from the circumstances of each case. The Committee if therefore of opinion that the entity in question can book sales in case of an F.O.R destination contract as soon as goods are delivered to the transporters if the entity does not retain significant risks and rewards of ownership in the goods.
(ii) Where significant risks and rewards of ownership in the goods have not been transferred to the buyer, on delivery thereof to the carriers by the seller, he (i.e. the buyer) should not book such purchases on such delivery. However, in case the property in the said goods has passed on to the buyer on delivery to the carriers, such purchases should be booked by the buyer on the delivery to the carriers even though goods are actually received later.
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