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

Narmada Foods Ltd. delivered goods worth Rs 5,00,000 to a customer on 28 March under a contract where the customer has a right to return them for 30 days, and the company cannot estimate returns. Nonetheless, the accountant wants to record the sale on 28 March on the ground that the invoice was raised. The Framework's recognition approach and the substance over form concept suggest which action?

Recognition should be deferred until the uncertainty over returns is resolved. By substance over form, an invoice alone does not show that significant risks and rewards have passed, and without a reliable estimate of returns the revenue cannot be recognised on 28 March.

  1. ARecord the sale because the invoice was raised
  2. BRecord half the sale because returns are uncertain
  3. CDefer recognition until the uncertainty about returns is resolved, because the substance is that significant risks and rewards have not clearly passedCorrect
  4. DRecord the sale and debit the amount as an expense for returns

Explanation

Substance over form requires reporting the economic reality rather than the legal form of an invoice. When returns cannot be estimated, the risk and reward transfer is not complete, so revenue should not be recognised. Part recognition has no basis since the estimate is impossible.

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