A public sector company is basically engaged in the manufacture and supply of life saving drugs for meeting the requirements of Central/State Government hospitals. As per the industry practice, the company is marketing its products through the channels of distribution which involve either a stockist or a distributing service agent.
In this case, the most critical parameter of the performance of the service agent is collection of payments on time. As per the agreement with service agent, as the percentage of commission payable depends upon the number of days taken for realisation of sale proceeds and beyond certain stipulated period it will decrease. Similarly, Company allows cash discount to other customers who purchased the goods and made payment within the specified period.
The company, follow a policy since inception, that it will recognise the accrual of the expenditure towards commission/cash discount at the point of realisation of the sale proceeds as the obligation to pay commission/cash discount accrues only on realisation of the sale proceeds within a stipulated period.
As per Statutory auditor, based on matching concept, commission should be recognised as expenditure in the year of sale. As the company is also has opinion that issue is involved in accounting.
The company has sought the opinion on the following issues arising from the above:
On the basis of the above, the opinion in respect of the issues raised by the company:
The above opinion was affirmed by the ICAI-Expert Advisory Committee.