5. EAC Opinion
Accounting for Sales Returns
Facts
A company has been in the business of manufacture of readymade garments for the last 5 to 6 years. It sells its products to franchisees located across the country. The company has stated that the sale is said to be completed at the time when risks and rewards of ownership of goods are transferred to the franchisees. Readymade garment industry is subject to change in trends of fashion and as such, some of the goods are returned and the company accepts them back as sales returns. According to the company, sales returns are said to be completed when the goods have been physically received back in the factory premises and all the risks and rewards of ownership have been transferred to the company. Hence, the company records the sales returns in its books of account on their physical receipt. On the basis of the past trend, sales returns work out to be approximately 20 to 22% of the sales for the year.
The company has further stated that the company has accounted for the sales return received during the financial year up to the balance sheet date but has not reversed the sales returns likely to be received after the balance sheet date, on the basis of past trend. During the course of audit for the financial year 2010-11, the auditors have raised an objection regarding booking of revenue from sales. The auditors are of the opinion that since there is a past trend indicating the return of goods sold to franchisees, the company should effect the reversal of sales on March 31, 2011 to the extent that the goods sold in the year 2010-11 are likely to be returned by the franchisees in the year 2011-12 and subsequent years.
Issue for consideration
On the basis of the above, the company seeks the opinion of the Expert Advisory Committee (EAC) on the question as to whether the present policy of the company regarding recognition of sales returns after the date of the balance sheet in the books of account only upon the physical receipt of goods from the franchisees is correct or should record the sales returns received after the date of the balance sheet on estimated basis taking into account the past trend?
Opinion
After considering para 11 of the Accounting Standard (AS) 9, ‘Revenue Recognition’ and paragraph 10 of Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, the Committee is of the view that since obligation in respect of sales return can be estimated reliably on the basis of past experience and other relevant factors, such as fashion trends, etc., in the company’s case, a provision in respect of sales returns should be recognised. The provision should be measured as the best estimate of the loss expected to be incurred by the company in respect of such returns including any estimated incremental cost that would be necessary to resell the goods expected to be returned. The Commit-tee is also of the view that as per paragraph 52 of AS-29, provisions should be reviewed at each balance sheet date and, if necessary, should be adjusted to reflect the current best estimate. As far as actual sales returns that occur between the balance sheet date and the date of approval of financial statements are concerned, the Committee is of the view that necessary adjustments should be made in this regard to the amount of the provision.
(Refer pages 1355 to 1357 of C.A. Journal for March 2012)
6. Guidance Note on Accounting for Real Estate Transactions
The earlier Guidance Note on this subject issued by ICAI in 2006 has now been revised in 2012. The revised Guidance Note is published on pages 1436 to 1440 at C.A. Journal for March, 2012. AS -7 relating to ‘construction contracts’ applies to accounting by construction contractors. The revised guidance note deals with Accounting by ‘Real Estate Developers’, ‘Builders’ and ‘Property Developers’. It applies to all projects in real estate which commence on or after 1-4-2012 and also to projects which have commenced but revenue is being recognised for the first time on or after 1-4-2012.
7. Guidance Note on Accounting for Rate Regulated Activities
This is a new Guidance Note. The objective of this Guidance note is to recommend the recognition of a regulatory asset or regulatory liability if the regulator permits the entity to recover specific previously incurred costs or requires it to refund previously collected amounts and to earn a specified return on its regulated activities by adjusting the prices it charges to its customers.
The effective date for this Guidance Note will be announced later on. This Guidance Note is published on page 1442 to page 1447 of C.A. Jounral for March, 2012.
8. Guidance Note on Accounting for self– generated certified Emission Regulations
The objective of this Guidance Note is to provide guidance for accounting by entities generating carbon credits in India. It comes into force for accounting periods beginning on or after 1-4-2012. Text of the Guidance Note is on pages 1448 to 1453 of C.A. Journal for March, 2012.
9. ICAI News
(Note: Page Nos. given below are from C.A. Journal for March, 2012)
(i) Action Plan for 2012-13
Our new President has presented his action plan for his term of office. Details are given on pages 1310 to 1314. We hope the Council members and other concerned members will give him full co-operation to achieve his goals.
(ii) 62nd Annual Function of ICAI
62nd Annual Function of ICAI was held at New Delhi on 11-2-2012. Minister of Corporate Affiars Dr. M. Verrappa Moily inaugurated the function. Y. H. Malagam and T. N. Manoharan, Padmashree Awardees, were felicitated at the function. Details of the function are at pages 1322 to 1330.
(iii) Chartered Accountants (Amendment) Act, 2011
As reported in February issue of BCAS Journal, the above amendment Act was passed by the Parliament in December, 2011. It is now reported that this amendment Act has come into force with effect from 1-2-2012. (Refer page 1351)
(iv)CARO 2003 Report
It may be noted that under para 4(ix)(a) of CARO, 2003 Report, the statutory auditors are required to report on the matter relating to regularity of the company in depositing undisputed statutory cess. The statement on CARO, 2003, issued by ICAI has now been amended and it is clarified that till the Rules are prescribed u/s.441A of the Companies Act, the statutory auditors need not make any comment about depositing undisputed statutory cess. (Refer page 1422)
(v) Exposure draft
Exposure draft of Standard on Internal Audit (SIA), dealing with ‘Related Parties’ is published on pages 1454-1456. Last date for sending commends by members is 30-4-2012.
(vi) New ICAI publications
(a) Implementation Guide to Standard on Auditing (SA) 530 ‘Audit Sampling’.
(b) Implementation Guide to Materiality in Planning and Performing an Audit.
(c) Guide on Environmental Audit.
(d) Technical Guide on Stock and Receivable Audit.
(e) Educational Material on Indian Accounting Standard (Ind AS)1, ‘Presentation of Financial Statements’.
(f) Educational Material on Indian Accounting Standard (Ind AS)2, ‘Inventories’.
(g) Compendium of Opinions (Volume XXIX).
(h) Aspects of International Taxation — A study (Revised in 2012).
