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Hi Mike,
Hope you are well…a simple one for you…if a company issues a credit note say on 6.1.15, in respect of a sale made on 20.12.14, (and the Year End is 31.12.14) is the issuance of the post year end credit note treated like an adjusting event in the 2014 accounts….i.e. Dr Revenue, Cr Receivables…..or is the credit note accounted for in the 2015 accounts with no impact on the sale recorded in the 2014 accounts??
Hope you can help
Thanks
LiamSorry MIke…the heading on my query should read “Pre Year End Sales” not “Post”
Liam
Hi
First of all it would have to be determined whether the amount involved were material. Clearly, if not, then no affect on 2014 figures.
But if it IS material, then the next consideration is WHY the credit note has had to be raised.
If this were an example of window-dressing, the directors should be persuaded by the auditors to treat the item as a NON-ADJUSTING subsequent event and if the directors refuse, then the auditors will qualify their audit opinion on the grounds of non-compliance with standards.
If its NOT an example of window-dressing and is simply the correction of an unfortunate pre-year-end error, not dissimilar to other error corrections in the past then, no, make no adjustment. But this latter scenario is difficult to imagine in practice.
Ok?
Hi Mike,
Thanks for the very prompt reply….
Just some clarifications….when you say “window dressing”, do you mean that the client waited until early 2015 to recognise credit notes, so as not to have to reduce 2014 Revenue??
Also, under normal trading conditions , where sales are made and then are after the year end goods are returned and a credit note is given, does the issue of credit notes post year end have any impact on pre year end income recorded…??
Thanks Mike
Liam
Window dressing is a technical expression – you should have come across it at F8. It means entering into (or not entering into) a transaction shortly before the year end and reversing it after solely with the intention of distorting the view of the financial statements.
Normal trading conditions referred to the idea that this company is in the habit throughout the year of having to issue credit notes (for whatever reason!)
If the issuance of the credit note to which you refer in your original post is just another in a long list of credit notes to be issued throughout the year, then, no, it’s probably not a matter requiring consideration
But if it’s a one-off unusual occurrence and it’s material, it looks to me very strongly like window dressing and the details should be fully disclosed within the notes to the financial statements. And the figures SHOULD NOT be adjusted. Just FULL DISCLOSURE of the facts, the amount involved and a quantification and explanation of the effect on the figures in the financial statements …”this would have reduced revenue, gross profit and net profit by $80,000 …….”
Ok?
Hi Mike,
Yep i think i have it now….to summarise, credit notes issued as part of normal trading activities say in January 2015 (using a 31 December 2014 Year End) have no impact on the 2014 numbers
However, where credit notes issued are part of a Window Dressing exercise (i.e. artifically inflate 2014 Revenue and then cancel some of it in early 2015 via credit notes) , this is a non adjusting event per IAS 10…hmmm……but , sorry , if a credit note is issued in early January 2015, which essentially reverses a “fake sale” recorded in the 2014 accounts, is the post year end issuance of the credit note an event which provides additional evidence of conditions existing at the reporting date…i.e. that the sale was in fact a fake , and so it should not be recorded in the 2014 accounts??
Isn’t that interesting! Yes, you could well think down those lines ……. but you’d be wrong! Window dressing is a specific activity (explained in my earlier post) and, when discovered by an auditor, leads to the fascinating scenario of the auditor requiring the directors to explain fully their shenanigans by way of note to the financial statements.
And if the directors refuse? Qualify opinion
And if the directors suggest simply reducing revenue by canceling the original sale and pretend the credit note was issued before the year end? Qualify opinion
And if the directors accede to the auditors and make a disclosure note, then the auditor won’t qualify opinion 🙂 …….. but will modify audit report with an emphasis of matter
Good stuff!
HI Mike,
An entertaining and informative reply from you….thanks again
P.s. am also a big fan of the “Royle Family” and especially the performances of your son, Ralph
Thanks
Liam
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