|
|
Total Number of Subscribers: 1626 |
|
|
|
|
|
|
|
Date:20th September 2010 |
Compiled by: M Sathya Kumar |
|
"Layaway sale refers to merchandise
that has been sold on deferred payment and as a result is “laid away”, that
is, physically separated from stock available for cash sale and is not handed
over to the customer until the entire payment has been made" Not only is the retail sector in Layaway sale — a popular concept in
countries such as the US, the UK and Canada, with big retailers and
small-time stores, alike, promoting such sales and attracting customers
through this model — is gaining momentum in India and one is li kely to hear
a lot more of this in the future, says Mr Rajiv Goyal, Director, Ernst
& Young India Pvt. Ltd. The ultimate objective for these retail
ventures/concepts is to grab the maximum share of customers’ wallets and the
retailers are trying to lure customers to utilise their maximum credit
limits. Therefore, retailers are introducing novel
schemes — the facility of money-back guarantee, ‘cash on delivery’ with no
upfront payment are a couple — to lure customers and create loyalty. While layaway sale is an interesting concept
and may catch the fancy of the consumers in Since the level and range of subjectivity regarding
revenue recognition could lead to different companies coming up with
different answers and thereby showing different financial results, Mr Goyal
is of the view that the Institute of Chartered Accountants of India (ICAI)
should come up with guidance on principles that are to be followed while
recognising the revenue under layaway sales transaction. Excerpts from the interview: Can you take us through the concept of
layaway sales? Layaway sale refers to merchandise that has
been sold on deferred payment and as a result is “laid away”, i.e.,
physically separated from stock available for cash sale and is not handed
over to the customer until the entire payment has been made. In this case, the retailer collects upfront
deposits from the customer for the sale of goods. Payment plans under layaway
sales arrangements range from a specific amount of money to be paid at set
intervals or total payments to be completed within a set period of time. It benefits the customer since he has the
flexibility to suit his cash flows. Goods are delivered only after the full
payment is made. Cancellation and refund policies vary amongst retailers with
a specified percentage being deducted by retailers before granting
cancellation. What are the challenges relating to this
new concept? While this concept is catching up in Similarly, customers cannot enforce delivery
of goods till he has paid the last instalment. Thus, the sale is not complete
and revenue recognition becomes uncertain. We have clear accounting guidance on
revenue recognition, don’t we? As per Accounting Standard (AS) 9 ‘Revenue
Recognition’ issued by the ICAI, the primary condition of revenue recognition
is transfer of risk and reward from the seller to the buyer. AS-9 specifies that revenue can be
recognised when 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 no significant uncertainty
exists regarding the amount of the consideration that will be derived from
the sale of the goods’. However, AS-9 does not stipulate physical
delivery of goods from the seller to the buyer as a fulfilling condition of
transfer of risk and reward to recognise revenue. In a layaway sales transaction, uncertainty
over timing of transfer of significant risk and rewards of ownership arises
due to the fact that the retailer’s ability to assess ultimate collection of
consideration with reasonable certainty is subjective. Are there specific guidelines relating to
handling this uncertainty for accounting purposes? As per AS-9, to recognise revenue in
uncertain circumstances, it should be measurable and, at the time of sale, it
would not be unreasonable to expect ultimate collection. Where the ability to assess the ultimate
collection with reasonable certainty is lacking, revenue recognition is
postponed to the extent of uncertainty involved. In such cases, it may be
appropriate to recognise revenue only when it is reasonably certain that the
ultimate collection will be made. While some retailers may take the above
stand and recognise revenue only post delivery of product to the customer,
others could argue that, since there is no linkage to actual delivery of
goods, revenue can be recognised at the time of entering into a layaway sales
transaction based on experience and financial loss to the buyer in case the
delivery is not taken; and that they can also make a provision for expected
sales return. What is the likely implication of this
scenario? The level and range of subjectivity
available in AS-9 regarding revenue recognition in layaway sales transaction
can mean that similar set of circumstances will lead to different companies
coming up with different answers, thereby showing different financial
results. So, what is the possible solution? Since it is not appropriate to recognise
revenue at the time of accepting upfront deposit as the primary condition of
“transfer of risk and reward” is not fulfilled, the ICAI should come up with
guidance on principles that are to be followed while recognising the revenue
under layaway sales transaction. Revenue should be recognised only after
physical delivery of merchandise to the buyer on receipt of full payment. Such
clarification will bring uniformity and comparability in financials results
of companies and will substantiate the meaning of general purpose financial
statements. Article by Mr Rajiv Goyal, Director, Ernst & Young Pvt. Ltd |
|
|
|
|
|
|
|
|
Rewards
waiting for feedback at |
|
|
|
|
|
Disclaimer: We believe that the information contained in this e-zine is true. If you do not wish to receive Smart Trainee please click here. |
|
|
|
|
|
Click here to contact us, if you are unable to view the content properly |
|
|
|
|
|
|
|
