Inventory items "given" in exchange for revenue

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Solowing
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Inventory items "given" in exchange for revenue

Post by Solowing »

My audit client, lets say their name is "TEAL Pvt Ltd" is a wholesale and retail seller of portable tea making machines, tea packets, and other related items.

I came across a unique situation. TEAL has temporarily "given" some tea machines to its' clients with just a verbal agreement, that in return for them providing the tea machines, their clients exclusively buy the tea packets from TEAL. These machines are still in TEAL's inventory, as they stated that these items were not sold, but given temporarily in exchange for sales.

I have never come across a situation like this, so would like your expert opinions on whether their current treatment is correct or not.
Leo
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Re: Inventory items "given" in exchange for revenue

Post by Leo »

This made me remember a post I wrote on the topics of modems, phones, "given" to clients with/without deposit (with return clause at the end of the contract term), see the inputs from the experts :

viewtopic.php?f=4&t=207&p=998&hilit=phone#p998

I think you might have to analyse it from IFRS16 perspective, if it falls under IFRS16, then I think you have to reclassify the corresponding inventory to PP&E. And if it didn't fall under IFRS16, then, analyse it from the IFRS15's perspective, to see whether it's distinct or not, if it's distinct, then reclassify the inventory to contract asset.
JRSB
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Re: Inventory items "given" in exchange for revenue

Post by JRSB »

if it's verbal then it's tricky to know what the position is, presumably you could just go and get them back at any time.... are the machines also for sale, so these are like a trial period/tester model? or do the tea products only fit that machine so it's like a cheap printer/expensive ink situation....
DJP
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Re: Inventory items "given" in exchange for revenue

Post by DJP »

I think this is a common arrangement in the beverages industry. I believe big breweries also own a lot of the stuff you find in bars. Don't think these agreements are just verbal though... You may want to look into the financial statements of big beverage corporations such as Heineken, AB-Inbev, or even Coca-Cola to see if you find any information in this respect. Can't be of much help here as this is not my industry, I'm afraid...
Solowing
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Re: Inventory items "given" in exchange for revenue

Post by Solowing »

JRSB wrote: 13 Jun 2022, 12:57 if it's verbal then it's tricky to know what the position is, presumably you could just go and get them back at any time.... are the machines also for sale, so these are like a trial period/tester model? or do the tea products only fit that machine so it's like a cheap printer/expensive ink situation....
I agree, the agreement being just verbal is the big issue. The directors are friends with the other client, so no formal agreement has been drafted to date. In theory, yes. The arrangement is made in a way that TEAL could recall the machines from the clients at any time, but my question is, would it be classed as held for sale if it is already with another client? I suppose I will have to ask them regarding this, maybe they are waiting till they get a buyer for this machine.

The tea products fit only that machine yes. But the clients don't just buy the tea products for just that machine from TEAL, they buy other tea-related items as well.
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Marek Muc
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Re: Inventory items "given" in exchange for revenue

Post by Marek Muc »

Solowing wrote: 13 Jun 2022, 16:56 would it be classed as held for sale if it is already with another client?
IFRS 5 isn't applicable here, as these machines are inventory, so current assets

As these machines are being used, their NRV will surely be lower than that of a brand new one, so a write-off may be needed:
https://ifrscommunity.com/knowledge-bas ... ble-value/
JRSB
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Re: Inventory items "given" in exchange for revenue

Post by JRSB »

"maybe they are waiting till they get a buyer for this machine" - so you sell the machines, so they're inventory currently out as demo units, so Marek's point is probably the long and the short of it
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Marek Muc
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Re: Inventory items "given" in exchange for revenue

Post by Marek Muc »

DJP wrote: 13 Jun 2022, 14:43 I think this is a common arrangement in the beverages industry. I believe big breweries also own a lot of the stuff you find in bars. Don't think these agreements are just verbal though... You may want to look into the financial statements of big beverage corporations such as Heineken, AB-Inbev, or even Coca-Cola to see if you find any information in this respect. Can't be of much help here as this is not my industry, I'm afraid...
I know for sure that branded fridges are often owned by the brand and not the store. But I wouldn't expect to find any specific disclosure though, it's immaterial for large corporates.
Leo
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Re: Inventory items "given" in exchange for revenue

Post by Leo »

Yea, I found only this from the financial statements of AB Inbev.

So, I presume it's under IFRS16, PP&E ?
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Marek Muc
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Re: Inventory items "given" in exchange for revenue

Post by Marek Muc »

Great finding!
Why do you think IFRS 16 applies here? To me, it's a typical PP&E under IAS 16
Leo
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Re: Inventory items "given" in exchange for revenue

Post by Leo »

Because I think it's equipment for rental, and AB Inbev is lessor here, even sometimes it's free ?
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Marek Muc
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Re: Inventory items "given" in exchange for revenue

Post by Marek Muc »

I doubt the pubs or stores are able to control the use of these items, i.e. obtain substantially all of the economic benefits and direct their use
https://ifrscommunity.com/knowledge-bas ... g-a-lease/
Leo
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Re: Inventory items "given" in exchange for revenue

Post by Leo »

I try to identify the accounting standard applicable here, so it's only ias 16 then ?
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Marek Muc
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Re: Inventory items "given" in exchange for revenue

Post by Marek Muc »

'here' means which scenario? :)
Leo
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Re: Inventory items "given" in exchange for revenue

Post by Leo »

when a company provide an equipment to the customer and take it back after. Because I thought that if it's not IFRS6 then, it should be analysed under IFRS15.

Let me take an example. A company such as Rentokil, they have bait boxes (Pest Control), the technician come to your home, place the bait boxes, leave, and come back after to collect them. Also they provide washroom equipment (Hygiene), all the stuff you see in the toilet, etc...

The customer hasn't the ownership and can't direct the use, so it's not under IFRS16 as lessor. It's analysed under IFRS15.

But I thought that, if it's IFRS15, it should be considered as inventory, not PPE?
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Marek Muc
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Re: Inventory items "given" in exchange for revenue

Post by Marek Muc »

it can also be an item of PP&E (IAS 16) located on customer's premises, it all depends on the arrangement
Leo
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Re: Inventory items "given" in exchange for revenue

Post by Leo »

so when we talk about rental, location to clients, it doesn't fall systematically under IFRS16 lessor accounting (finance lease&operating lease), it can also be under IFRS 15 (distinct PO or not) or IAS 16 ?
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Marek Muc
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Re: Inventory items "given" in exchange for revenue

Post by Marek Muc »

yes
Leo
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Re: Inventory items "given" in exchange for revenue

Post by Leo »

Thanks Marek !
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