Shipping Terms and Revenue Recognition

Many companies will ship goods to customers either in Thailand or overseas using International Commercial Terms (“Incoterms”).

Keywords: Mazars, Thailand, Accounting, CIP, Incoterms, Ex-Works, IAS, TFRS, NPAEs

24 April 2015

A full copy of Incoterms with the relevant key terms and conditions may be purchased on the International Chamber of Commerce website

Company “A” has a sales agreement with an overseas based customer, Company “B”, for which the applicable shipping terms for the delivery of goods can be either “CIP” or “Ex-Works”. The shipping terms are in line with Incoterms.

So, when should Company A recognise the revenue relating to the sale of goods in its financial statements?

Under IAS 18 and TFRS for NPAEs paragraph 326, the following conditions must be satisfied before revenue can be recognised by Company A:

i. The Company has transferred to the buyer the significant risks and rewards of ownership of the goods;

ii. The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

iii. The amount of revenue can be measured reliably;

iv. It is probable that the economic benefits associated with the transaction will flow to the entity; and

v. The costs incurred or to be incurred in respect of the transaction can be measured reliably.

Based on the above shipping terms scenarios, two criteria need specific additional assessment before revenue is recognised.

a. Delivery terms under the contract; and

b. Effective point of transfer of ownership, risks & rewards.

The following table describes for each relevant delivery term in this example, when the risks and rewards of ownership transfer from the selling Company to the customers. The Company should account for revenue recognition in the financial statements accordingly.

Delivery terms Revenue recognition point
CIP (Carriage and Insurance Paid) Ownership transfers from the Company A to Company B when the goods have been delivered to the shipping carrier. The customer is responsible for shipping and insurance costs and must reimburse the seller once goods are physically received at place of destination.
Ex-Works Ownership transfers from Company A to Company B when goods physically leave Company A’s premises. (e.g. factory or warehouse). Shipping costs may be due for payment by Seller or Customer depending on contractual arrangements.

Incoterms include numerous different types of shipping conditions, each of which may have a different revenue recognition point. More information can be found on the International Chamber of Commerce website.

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