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More Revenue recognition to fulfill business target is classified fraud?


Dear Sir/Madam, We are selling our products to our distributors. To fulfill management target,  we plan to sell more to distributors so that the stock level at distributor premises exceed the agreed level. We plan to compensate the distributors with the extension of 'term of payment'. Regarding the risk and transfer of ownership & other things mentioned in IAS18, are met. Do you think this can be classified as accounting fraud? Thank you

asked Dec 3, 2014 in IAS 18 - Revenue by anonymous

1 Answer

0 votes
IAS 18.14 Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:
(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
(b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the transaction will flow to the entity; and
(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably

If the above conditions can be met you can recognize revenue.  But is it probable that the economic benefits associated with the transaction will flow to the entity? Just loading stocks into dealers will not earn you profits. This may be considered as form of  "window dressing" in accounting.
answered Dec 13, 2014 by Kapig Level 2 Member (3,350 points)
I agreed with Kapig answer above, with a note to add. Even the revenue is recognised by meeting all the requirement under IAS 18, it might still subject to impairment of Trade Receivable under IAS 39 "Financial Instrument". The impairment indicators might present with the evidence of selling stock level to distributor premises in excess of the agreed level, combined with extension of payment term. If that the case, the impairment will be charged out to P&L, albeit it might not reduce "Revenue", it could effectively wipe out the higher bottom line achieved by "higher" revenue, or worst, reduced the earning as impairment loss recognised higher than Revenue you managed to "slot in".


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