Revenue Recognition 1863

  • Hi all
    Not sure whether this is a SOX issue or not, but here goes.
    Our Finance Department have found out that Sales have been encouraging disctributors to place orders on us before the distributor has a customer, and in return we have granted extended credit terms. Part of me says that as long as the extended terms are authorised, that will satisfy SOX, but on the other hand I worry that recognising such revenue may be exactly the sort of thing that SOX was envisaged to prevent. Your thoughts would be greatly appreciated.
    Many thanks

  • It again depends on the terms on which Your organization supplies to distributers. Is it with a ‘Returnable’ if not sold within a said period or is it sold as non-returnable material.
    Risks and rewards should be completely transferred, Ultimate collection of the sale proceeds should be clear.Basics of revenue recognition.
    If the goods are on Returnable basis then they are typically Consignment sale materials, and revenue does not happen if the goods are sold to end customer.
    End of it, it very much depends on the kind of arrangement with your distributors.
    Hope it helped

  • Richard:
    If the distibutor is your customer and the extended credit terms have been authorized, then I see no problem. It appears to me that the extended credit terms would be valuable to the distributor because it would allow more favorable terms to be extended to their customers. A win win situation for all parties.

  • Hi Richard and welcome to the forums 🙂
    I’m more of an IT person and will share the following ideas:

    1. While the process of extending credit is acceptable from a business perspective, I agree with the concerns on how this should be stated in the G/L and other financials.
    2. I’m seeing this more as potential income rather than a real transaction for sale of goods/services. Thus I’m inclined to vote for a more conservative posture of exlcuding these items from the books. ( however, please go with the opinions of SOX members more versed in accounting, in case there’s disagreement ).
    3. Hopefully, internal audit or the external auditors might render an opinion for you that’s specific for your particular situation for both the process and how to count it on the books.
    4. It might be best to capture and track USDUSDUSD in these categories as a completely separate journal entry, so it’s not accidently combined with real sales data.

  • Thanks for your input guys. I guess we have to look at what would happen if the distributir doesn’t get an order.

Log in to reply