As mentioned in the illustrative example of the vendor allowances agreement, ass
ID: 2748880 • Letter: A
Question
As mentioned in the illustrative example of the vendor allowances agreement, assume that on September 1st 2013, CPC paid £560 million to Tesco in exchange for Tesco’s commitment to purchase 3.5 billion units of CPC’s products. At the end of the contract period (August 31st 2014), the amount of sales allowances was calculated based on Tesco’s actual purchases (3.65 billion units at £2 per unit) during the contract period and difference was settled in cash between CPC and Tesco. (a) CPC recognized the payment of £560 on September 1st 2013 as SGA (Selling, General and Administrative) expenses, and the cash settlement on August 31st 2014 as an adjustment to SGA expenses. Explain whether or not CPC’s recording of sales allowances as SGA expenses is in compliance with the International Financial Reporting Standards (IFRS) and the U. S. GAAP. Cite paragraphs from the appropriate professional pronouncements.
Explanation / Answer
Yes it in compliance with IFRS and US GAAP.
FRS allows for expenses to be classified according to function or by nature, whichever provides more reliable and relevant information, whereas under US GAAP, expenses are classified by function only.
The ‘classification by nature’ identifies costs and expenses in terms of their character, such as salaries and wages, raw materials consumed, and depreciation of plant assets. On the other hand, the ‘classification by function’ presents the expenses in terms of the purpose of the expenditure, such as for manufacturing, distribution, and administration.
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