Revenue Cut-off and Consignment Stock at a Rwandan Coffee Exporter
Kivu Peak Coffee Ltd, a Rwandan exporter reporting under IFRS, shipped 18 tonnes of fully washed coffee on 28 December 20X4 to a Belgian buyer. The invoice (USD 96,000) was dated 30 December. The bill of lading is dated 3 January 20X5. Contract terms are CIF Antwerp, with title and control transferring when goods are loaded on the vessel. The vessel loaded on 2 January. Separately, 6 tonnes were sent on consignment to a Kenyan roaster in November; no buyer had been identified and the roaster may return unsold stock. The finance manager booked both shipments as 20X4 revenue to hit a USD 1.2m bank covenant. Pre-tax profit without these entries is USD 310,000; the covenant requires reported revenue of at least USD 1.15m. The 20X4 revenue figure currently stands at USD 1.14m before the two entries.
1. Determine whether the two shipments should be recognised as 20X4 revenue under IFRS 15, and quantify the effect on reported revenue and the covenant.
Read the worked answer
Shipment 1 (Belgium, USD 96,000): Under IFRS 15, revenue is recognised when control transfers. The contract states control passes on loading; the vessel loaded 2 January 20X5. The invoice date and CIF terms do not override the transfer-of-control point. Therefore the USD 96,000 belongs in 20X5, not 20X4. It is a cut-off error.
Shipment 2 (Kenya consignment, 6 tonnes): Consignment stock with no identified buyer and a right of return means the roaster is an agent holding inventory; Kivu Peak retains control and the performance obligation is not satisfied. No revenue is recognised on despatch.
Quantified effect:
- Reported revenue before entries: USD 1,140,000
- Remove Belgium shipment: 1,140,000 − 96,000 = 1,044,000
- Consignment (amount not given but also not revenue) is excluded.
- Corrected revenue ≈ USD 1,044,000, which is below the USD 1,150,000 covenant threshold.
Conclusion: The entries are not permissible. Even one of them alone (Belgium) breaches the covenant. The finance manager's treatment misstates revenue and profit and, if intentional, is fraudulent financial reporting. The auditor should propose adjustment, escalate the covenant breach to those charged with governance, and consider the going-concern/disclosure implications and the bank's right to demand repayment.
2. The CFO argues that because the invoice was dated 30 December and goods were 'in transit' by year-end, revenue is defensible. Construct the auditor's response, including the evidence you would gather.
Read the worked answer
Auditor's response to the CFO:
Restate the principle: IFRS 15 focuses on transfer of control, not invoicing or risk of loss. CIF terms govern freight and insurance, not the control date agreed in the contract. The contract explicitly ties control to loading.
Evidence to obtain:
- The signed sales contract and Incoterms clause.
- Bill of lading (dated 3 January) and vessel loading record (2 January).
- Shipping instructions and port authority records.
- Cut-off testing: sample despatches around year-end and match to loading dates.
- Consignment agreement with the Kenyan roaster confirming right of return and no identified buyer.
- Management representations and board minutes discussing the covenant.
Assess intent: The timing of the invoice and the covenant pressure are red flags. The auditor should evaluate whether this is an error or deliberate manipulation (ISA 240).
Reporting consequences:
- Propose adjusting journal entries.
- If management refuses, consider modification of the audit opinion (ISA 705) and communicate with those charged with governance.
- Consider whether the breach triggers a duty to report or affects going concern.
Key judgement: The auditor cannot accept an accounting policy that contradicts the contract merely because it is convenient for covenant compliance.