Year-end cut-off under a disputed delivery
You are preparing the 2024 annual accounts of Van Acker Metaal bv, a small trading company with a December year-end. Turnover is around €2.4 million and the materiality threshold agreed with the client is €25,000. On 28 December 2024 the company shipped goods with a sales invoice value of €48,000 (cost €31,000) to a customer, FOB destination. The carrier's signed proof of delivery is dated 6 January 2025. The invoice was recorded in the 2024 sales ledger, and the goods were removed from inventory on 28 December. The customer disputes a €9,000 quality claim in writing on 3 January 2025. The client's accountant argues the sale belongs in 2024 because the invoice and the shipping document are both 2024-dated, and that the quality claim is a 2025 event. The client is applying for bank financing in March 2025 and wants the strongest defensible result.
1. Determine in which period the €48,000 sale should be recognised and explain how the FOB destination term affects the cut-off. State the adjusting entry or entries you would propose.
Read the worked answer
Under FOB destination, control of the goods passes to the buyer on delivery, not on shipment. The signed proof of delivery is dated 6 January 2025, so the performance obligation is satisfied in 2025. The 2024 sales invoice is therefore a cut-off error, not a valid sale.
Proposed adjustments at 31 December 2024:
- Reverse the sale: debit Turnover €48,000, credit Trade receivables €48,000.
- Restore inventory: debit Inventory €31,000, credit Cost of sales €31,000.
- The €9,000 quality claim is a separate matter. Because the claim concerns goods not yet delivered at year-end, it is not a 2024 liability; but it is evidence about the value of the inventory at year-end. Consider whether net realisable value of those goods is below €31,000. If the claim is expected to be accepted, write the inventory down by the expected settlement amount, e.g. debit Write-down of inventory €9,000, credit Provision for inventory write-down €9,000.
Net effect on 2024 profit: turnover down €48,000, cost of sales down €31,000, possible write-down €9,000 - a reduction of between €17,000 and €26,000. The €17,000 base effect is below the €25,000 materiality threshold, but combined with the write-down it crosses it. Document the judgement, discuss it with the client, and note that presenting an overstated 2024 turnover to the bank would mislead the lender.
2. The client insists on keeping the sale in 2024. What is your professional response, and how would you report the matter if the client does not move?
Read the worked answer
First, quantify the effect and explain it in plain terms: 2024 turnover and receivables are overstated by €48,000, inventory and cost of sales are misstated by €31,000, and profit before tax is overstated by €17,000 to €26,000 depending on the write-down. Point out that the delivery document is objective evidence and that a bank reviewing the file may ask for proof of delivery.
Second, offer a defensible alternative only if it is genuinely supportable - for example, if there is separate evidence that the customer actually took control before year-end (e.g. the customer arranged its own collection and signed a receipt on 30 December). Absent such evidence, the cut-off must be corrected.
Third, if the client refuses, escalate in writing to the client's management or board, record the discussion, and consider the effect on the audit opinion. If the misstatement is material and uncorrected, issue a qualified opinion on the financial statements, describing the matter in the basis for qualified opinion. If it is pervasive, consider an adverse opinion. Also consider the impact on your own file: the financing application may amount to a misleading representation, and your professional standards require you not to be associated with misleading information. Finally, document the matter in the engagement file and consider whether continuing the engagement is appropriate.