- This topic has 10 replies, 3 voices, and was last updated 11 years ago by
.
- Posts
According to IFRS, settlement discounts should be deducted from the cost of inventories.
(FYI, it is stated in IFRIC Update Aug 2002 and is repeated in Nov 2004 issue.) But many people still treat settlement discounts (purchases discounts or discounts received) as an increase in income. I’d like to know ACCA’s position on this matter. Can you please help me?
Thanks.ACCA’s position will be the same as IFRSIC’s
Now, here’s a puzzle for you to answer.
I appreciate that you are full of researched knowledge but wonder whether you might be better if you channelled your efforts into areas that are more likely to be asked in ACCA exams.
For example, why would an F7 student like you think that a possible double entry for a particular transaction would result in (and I quote you here!)
“assets increase, liabilities decrease”
Andy, if IFRSIC have made their statement and reaffirmed it not only in 2002 but also in 2004 forsooth, then you follow IFRSIC and accept my undying gratitude for pointing out the error of my ways. I shall be forever in your debt
Thank you
Incidentally, could you please give me the IAS / IFRS / IFRSIC references that state that settlement discounts should be deducted from the cost of inventory? It would be much appreciated
Many thanks in advance
Thank you for your advice.
In fact, I have stated the source in my post. The links are given below (thanks to Google):
https://www.ifrs.org/Updates/IFRIC-Updates/2002/Documents/aug02.pdf
https://www.ifrs.org/Updates/IFRIC-Updates/2004/Documents/nov04.pdfWhen I asked for the reference, I meant the reference from within the source. I can see that the sources were identified! I did see that the sources were identified! And I still can see that the sources were identified!
What I asked for was a reference (from within those sources) 🙂
For example, a paragraph number or sub-section number.
In addition, when quoting those references to me, please also quote the paragraph reference from within IAS 2 that has pushed you down this line of thinkingMany thanks
why shud the way the inventory is valued change the way the discount is dealt with when u get it?
Because inventory is valued at the lower of cost and net realizable value and the discussion on this thread is whether the settlement discount should be deducted from the cost of the inventory. We know that trade discounts and “cash” discounts (available when you dont ask for credit) are netted off the selling price. But what about settlement discounts? (discounts for paying within a shorter-than-normal time period)
I know that.
All I mean is that cannot it just be adjust at the end of the year when inventory is valued.
I think the issue is deeper that hat, Christine.
We’re looking here not just at the year end valuation of inventory but also at the amount at which purchases are recorded and that clearly has an impact on cost of sales and gross profits
From the “other side” it also affects the amount at which revenues / sales is recorded
To keep things simple, let me quote the relevant part in IFRIC Update (November 2004) here:
“IAS 2 Inventories: Discounts and rebates
The IFRIC considered three related questions on the application of IAS 2 Inventories that had been referred to it by the Urgent Issues Group (UIG) of the Australian Accounting Standards Board:
(a) whether discounts received for prompt settlement of invoices should be deducted from the cost of inventories or recognised as financing income.…..
On (a), the IFRIC tentatively agreed that settlement discounts should be deducted from the cost of inventories. Because the requirements under IFRSs were sufficiently clear, the IFRIC tentatively agreed that the matter should not be added to the agenda.”
Please note that this accounting treatment is not explicitly stated in IAS 2 and that’s why interpretation or clarification is required. I’m afraid no further reference can be provided.
Thank you.
p.s. I have studied US GAAP accounting at a basic level and this is the generally accepted approach under U.S. GAAP.
It’s possibly why IFRSIC refused to make a definitive decision on the matter. You quote the question from the Australians asking for an answer to their Urgent Enquiry addressed to the Urgent Issues Group. Yet that group refrained from giving any definitive answer – to put it simply, with due respect to the Australians, they are trying to turn the World upside down.
Just accept that ACCA’s situation is one where settlement discounts are treated as expenses – and incidentally that’s also the approach adopted by the “Big2” tuition providers approved by ACCA. I refer of course to BPP and Kaplan
- The topic ‘settlement discounts’ is closed to new replies.