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MR RAJIV GOYAL, DIRECTOR, ERNST & YOUNG INDIA PVT. LTD.

Not only is the retail sector in India seeing a number of new entrants, but also new and interesting formats like home shopping via television channel and online portals (e-commerce).

Layaway sale — a popular concept in countries such as the US, the UK and Canada, with big retailers and small-time stores, alike, promoting such sales and attracting customers through this model — is gaining momentum in India and one is li kely to hear a lot more of this in the future, says Mr Rajiv Goyal, Director, Ernst & Young India Pvt. Ltd.

The ultimate objective for these retail ventures/concepts is to grab the maximum share of customers’ wallets and the retailers are trying to lure customers to utilise their maximum credit limits.

Therefore, retailers are introducing novel schemes — the facility of money-back guarantee, ‘cash on delivery’ with no upfront payment are a couple — to lure customers and create loyalty.

While layaway sale is an interesting concept and may catch the fancy of the consumers in India, there are issues and challenges, especially relating to accounting process for the retailers, cautions Mr Goyal. ‘Revenue Recognition’ is an important accounting issue to be addressed in a layaway sales transaction, he adds, in the course of an email interaction with Business Line.

Since the level and range of subjectivity regarding revenue recognition could lead to different companies coming up with different answers and thereby showing different financial results, Mr Goyal is of the view that the Institute of Chartered Accountants of India (ICAI) should come up with guidance on principles that are to be followed while recognising the revenue under layaway sales transaction.

Excerpts from the interview:

Can you take us through the concept of layaway sales?

Layaway sale refers to merchandise that has been sold on deferred payment and as a result is “laid away”, i.e., physically separated from stock available for cash sale and is not handed over to the customer until the entire payment has been made.

In this case, the retailer collects upfront deposits from the customer for the sale of goods. Payment plans under layaway sales arrangements range from a specific amount of money to be paid at set intervals or total payments to be completed within a set period of time.

It benefits the customer since he has the flexibility to suit his cash flows. Goods are delivered only after the full payment is made. Cancellation and refund policies vary amongst retailers with a specified percentage being deducted by retailers before granting cancellation.

What are the challenges relating to this new concept?

While this concept is catching up in India, ‘revenue recognition’ is an important accounting issue to be addressed in a layaway sales transaction. The retailer still retains the risks of ownership of the merchandise as it has received only a deposit from the customer and does not have an enforceable right to the remainder of the purchase price.

Similarly, customers cannot enforce delivery of goods till he has paid the last instalment. Thus, the sale is not complete and revenue recognition becomes uncertain.

We have clear accounting guidance on revenue recognition, don’t we?

As per Accounting Standard (AS) 9 ‘Revenue Recognition’ issued by the ICAI, the primary condition of revenue recognition is transfer of risk and reward from the seller to the buyer.

AS-9 specifies that revenue can be recognised when the ‘seller of goods has transferred to the buyer the property in the goods for a price’ or ‘all significant risks and rewards of ownership have been transferred to the buyer and no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods’.

However, AS-9 does not stipulate physical delivery of goods from the seller to the buyer as a fulfilling condition of transfer of risk and reward to recognise revenue.

In a layaway sales transaction, uncertainty over timing of transfer of significant risk and rewards of ownership arises due to the fact that the retailer’s ability to assess ultimate collection of consideration with reasonable certainty is subjective.

Are there specific guidelines relating to handling this uncertainty for accounting purposes?

As per AS-9, to recognise revenue in uncertain circumstances, it should be measurable and, at the time of sale, it would not be unreasonable to expect ultimate collection.

Where the ability to assess the ultimate collection with reasonable certainty is lacking, revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made.

While some retailers may take the above stand and recognise revenue only post delivery of product to the customer, others could argue that, since there is no linkage to actual delivery of goods, revenue can be recognised at the time of entering into a layaway sales transaction based on experience and financial loss to the buyer in case the delivery is not taken; and that they can also make a provision for expected sales return.

What is the likely implication of this scenario?

The level and range of subjectivity available in AS-9 regarding revenue recognition in layaway sales transaction can mean that similar set of circumstances will lead to different companies coming up with different answers, thereby showing different financial results.

So, what is the possible solution?

Since it is not appropriate to recognise revenue at the time of accepting upfront deposit as the primary condition of “transfer of risk and reward” is not fulfilled, the ICAI should come up with guidance on principles that are to be followed while recognising the revenue under layaway sales transaction.

Revenue should be recognised only after physical delivery of merchandise to the buyer on receipt of full payment. Such clarification will bring uniformity and comparability in financials results of companies and will substantiate the meaning of general purpose financial statements.

D. MURALI

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