ACCA Strategic Professional · Strategic Business Reporting (International) · Professional and ethical behaviour in corporate reporting
Orrin Co sold goods worth $4 million to a distributor on 28 December, the last trading day of its year ended 31 December. A side letter, known only to the sales director, allows the distributor to return all unsold goods without penalty up to 31 March, and the distributor has no history of sales to end customers. The accountant believes the sale was arranged to reach a profit target. Applying IFRS 15 and ethical principles, which is the most appropriate conclusion?
Revenue should be recognised only to the extent a significant reversal is highly probable not to occur, which here is little or none because of the unrestricted return right and no sales history. The accountant should also escalate the concealed side letter to those charged with governance as suspected manipulation.
- ARecognise the full $4 million, since legal title passed before the year end
- BRecognise revenue only to the extent it is highly probable that a significant reversal will not occur, which here means little or none, and raise the side letter concern with those charged with governanceCorrect
- CRecognise revenue and disclose the side letter as a contingent liability
- DRecognise revenue in full and create a provision for expected returns equal to the profit on the sale
Explanation
Under IFRS 15 the right of return makes consideration variable and revenue is constrained to the amount highly probable not to reverse; with unrestricted returns and no sales history, essentially nothing qualifies. The concealed side letter also suggests deliberate manipulation, so the accountant should escalate to governance. Recognising in full ignores the constraint, and a contingent liability or profit-only provision does not fix the revenue error.
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