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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Kaveri Textiles Ltd. has received a firm purchase order from a customer for goods to be delivered next quarter. The order has been signed, but no goods have been delivered and no payment has been made or received. Under the Framework for Preparation and Presentation of Financial Statements, how should the company treat the order in its books at present?

The order should not be recognised at present. Assets and liabilities arise only from past events, and an unperformed firm order is an executory contract. Until goods are delivered, there is no asset, revenue or liability to record in the financial statements.

  1. ARecognise it as an asset because future economic benefits are expected
  2. BRecognise it as revenue because the contract is legally enforceable
  3. CRecognise it as a liability because the company is bound to deliver goods
  4. DDo not recognise it, as there is no past event giving rise to an asset or liability yetCorrect

Explanation

Under the Framework, an asset or liability arises from a past event. A signed order with nothing yet performed is an executory contract, so no asset, revenue or liability is recognised. Treating it as revenue would ignore that the goods have not been delivered and risks and rewards have not passed.

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