Classification of Inventory in bill and hold arrangement

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Hussein
Posts: 15
Joined: 10 Oct 2022, 22:59

Classification of Inventory in bill and hold arrangement

Post by Hussein »

Hi,

Please consider the following scenario:

I have a Company, Co H, based in Mauritius. It purchases lorries from a supplier Co S, based in China, and then sells them to its customers which are spread over the African continent. H places orders with S for the purchase of lorries even before H has obtained customers to which it will resell those. Once the orders are placed, S will construct those trucks for H. When the production of trucks is completed, S will inform H and the latter will then make full payment for the trucks. In order to reduce shipping costs, H requests S to store these lorries in its warehouse up until H has found a customer who is willing to buy trucks. Then H will communicate with S to ship the trucks directly to H’s client.

The main terms and conditions are:

When full payment has been made, the trucks become the property of H. At that point in time S cannot sell the trucks to any other party and cannot use it for its own purpose. It is only H which will decide what it wants to do with the trucks. The trucks are identified separately as belonging to H and the trucks are currently ready for transfer to H. As such, it can be said that H has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the trucks. H also has the ability to prevent other entities, including S, from directing the use of, and obtaining the benefits from, the trucks. Up to here it seems that the trucks should be recorded as inventories by H.

However, insurance risk (risk that any damage happens to the trucks) associated with the trucks are with S from the time the lorries are produced till the time the lorries are shipped. This means that S will compensate for any damage to the trucks up to shipment. Once on board the ship, the insurance risk is with H. I want to know whether this insurance risk will impact on the determination of inventory classification by H?

For me, it should not impact since it is a normal practice for this risk to be with S since it would not be practical for H to compensate for a damage caused to the truck due to the fault of S. This should not be impacting on the determination of control. Other risks are borne by H. For example, if the truck becomes obsolete (due to changes in technology) while it is at S’s warehouse, it is H which will face a loss since it will recover a lower amount from sales.

Grateful to have your views on this issue.

Thanks
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Marek Muc
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Re: Classification of Inventory in bill and hold arrangement

Post by Marek Muc »

I also think that H should recognise the trucks as its inventory once the ownership is transferred to H. This is discussed (albeit from S's perspective) in IFRS 15.B81
Hussein
Posts: 15
Joined: 10 Oct 2022, 22:59

Re: Classification of Inventory in bill and hold arrangement

Post by Hussein »

Thanks a lot Marek
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