Seller received a $450,000 order during October 2015 for a milk processing syste

Question

Seller received a $450,000 order during October 2015 for a milk processing system from Buyer Industries (“Buyer”). The final system will include a component, to be provided by Buyer, that makes the system compatible with Buyer’s existing processing equipment.

Knowing that Seller usually raises its prices each year on January 1, Buyer requested 2015 pricing and delivery of the system for March 2016. Seller responded that to receive 2015 pricing, Buyer would have to take title to the system by December 31, 2015, which Buyer agreed to.

During November 2015, Seller’s Accounting Manager reviewed the purchase order and noted that it was not clearly stated in writing when the system would be shipped and when Buyer would take title to and risk of ownership for the system. As such, at Seller’s request, Buyer submitted an amended purchase order as follows:

The system is required to be shipped to a third-party warehouse in December 2015.

Before shipment to the third-party warehouse, Seller must procure an insurance policy for the system in Buyer’s name, with the cost of the insurance policy to be paid by Buyer.

Upon arrival to the third-party warehouse, Buyer will take title to and risk of ownership for the system and Seller will invoice Buyer for 95% of the system price, with 30-day payment terms.

In January 2016, the system will be shipped back to the Seller facility in order to attach the final component. (The final component, provided by Buyer, will not be available until mid-January.)

In March 2016, Seller will ship the completed system to Buyer’s facility and invoice the remaining 5% of the system price.

During December 2015, the processing system was shipped to the third-party warehouse as promised. The warehouse chosen by Seller is less than a mile from its facility and is often used by Seller when it requires additional storage space.

- Is the $450,000 can be recognized as revenue during 2015?

Explanation / Answer

IFRS provide five criteria for identifying the event for recognizing revenue on sale of goods:

(1) Risks and rewards incident to ownership have been transferred from seller to buyer

(2) Seller has no title on goods sold

(3) There is certainity of collection of payment

(4) The amount of revenue can be reasonably measured in monetary terms

(5) Cost incurred for earning the revenue can be identified

If the above conditions are satisfied, then revenue can be recognised.

In the given situation, risk and reward incidental to ownership has been transferred to buyer, the title of goods has been transferred to the buyer, even though the buyer has no physical possession goods, the billing for the 95% of amount has been done to buyer and there is certainity of collection of the same, the revenue can be measured and costs are identifiable, thus revenue can be rognised during 2015 but only to the extent of 95% of the cost of the system i.e. 95% of $ 450,000 i.e. $ 427,500 and the remaining 55 shall be recognised when the arrangement is completed in 2016

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