25 June 2014
I need a clarification regarding booking of purchase under high sea sale basis. 1.how does purchase are booked under high sea sale? 2.When are risk & reward are said to be transferred under High sea sales? 3.what about treatment in case goods are not received as on closing date? 4.Treatment of expense of custom duty paid in said case (i.e., goods not received on closing date) ? 5.Reference of any accounting standard & guidance notes if any.
18 July 2024
High sea sale refers to a transaction where the sale of goods takes place while they are in transit or before they have crossed the customs border of the importing country. Here’s how purchases are booked under high sea sale and other related aspects:
### 1. Booking of Purchase under High Sea Sale:
- **Invoice and Accounting:** The purchase under high sea sale is booked based on the invoice issued by the seller. The buyer records the purchase in their books when the invoice is received, even though the goods are still in transit. - **Recognition:** The purchase is recognized as per the invoice date or the date on which the ownership/title of the goods transfers from the seller to the buyer.
### 2. Transfer of Risk and Reward:
- **Legal Framework:** Risk and reward transfer in high sea sales depend on the contractual terms between the buyer and the seller. - **Default Rule:** Generally, risk and reward transfer occur when the goods are handed over to the first carrier (often the shipping company) for shipment. - **Documentation:** It is crucial to have proper documentation (such as bill of lading, insurance documents) to determine the transfer of risk and reward.
### 3. Treatment if Goods are Not Received by Closing Date:
- **Accounting Treatment:** If goods are not received by the closing date (end of accounting period), the purchase is still recorded based on the invoice received. - **Disclosure:** A provision is made for goods not received to reflect the potential liability. - **Implications:** This may affect inventory valuation and financial reporting, depending on the accounting policies followed by the company.
### 4. Treatment of Custom Duty Expense:
- **Goods Not Received:** If goods are not received by the closing date, any customs duty paid is treated as a prepaid expense or an advance. - **Adjustment:** Upon receipt of goods, the prepaid customs duty is adjusted against the actual duty payable. - **Disclosure:** Proper disclosure in financial statements is essential to reflect the prepaid nature of customs duty until goods are physically received.
### 5. Accounting Standards and Guidance:
- **AS 2 (Valuation of Inventories):** Provides guidelines on the determination of cost of inventories, which includes the treatment of purchase costs under different scenarios. - **AS 9 (Revenue Recognition):** Provides principles for recognizing revenue from sale of goods, which indirectly influences the timing of recognizing purchases. - **Guidance Notes:** The Institute of Chartered Accountants of India (ICAI) may issue specific guidance notes on high sea sale transactions to provide further clarity on accounting treatment and disclosures.
### Conclusion:
High sea sale transactions involve complex logistics and financial implications. Proper documentation, adherence to contractual terms, and compliance with accounting standards are crucial to ensure accurate recording of purchases, treatment of expenses, and disclosures in financial statements. It’s advisable to consult with a qualified accountant or seek guidance from relevant accounting standards and regulatory authorities for specific cases.
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