As mentioned in the illustrative example of the vendor allowances agreement, ass

Question

As mentioned in the illustrative example of the vendor allowances agreement, assume that on September 1st 2013, CPC paid £560 million to Tesco in exchange for Tesco’s commitment to purchase 3.5 billion units of CPC’s products. At the end of the contract period (August 31st 2014), the amount of sales allowances was calculated based on Tesco’s actual purchases (3.65 billion units at £2 per unit) during the contract period and difference was settled in cash between CPC and Tesco.

(b) Tesco recognized the receipt of £560 on September 1st 2013 as sales revenues, and the cash settlement on August 31st 2014 as an adjustment to sales revenues. Explain whether or not Tesco’s recording of sales allowances as sales revenues is in compliance with the International Financial Reporting Standards (IFRS) and the U.S. GAAP. Cite paragraphs from the appropriate professional pronouncements.

Explanation / Answer

Discounts provided to the customer would be accounted for as reduction of sales.

Under current US GAAP, a vendor typically treats cash consideration paid or payable to a customer as a reduction of revenue. As further discussed in the revenue recognition FRD, under the proposed model, consideration paid or payable to the customer, depending on the nature of the arrangement, could represent:

1. A discount or refund for goods or services provided to the customer, which would be accounted for as a reduction of revenue
2. A payment for distinct goods or services received from their customer, which would generally be expensed (or, in certain cases, capitalized) in accordance with other US GAAP guidance
3. A combination of both

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.