Ind AS Interim Accounting for Volume Rebates

1. Question

Prism Manufacturing Limited (hereinafter referred to as “the company”) engaged in the production of industrial machinery, procures steel from SteelFlex Limited (hereinafter referred to as the supplier) under an annual supply agreement for the financial year 2024–25. The agreement includes a volume rebate clause, which provides that if cumulative purchases exceed 2,000 metric tonnes or the value of purchases exceeds ₹10 crore during the financial year, the company will be entitled to a 5% rebate on the total purchase value. As per the terms, the rebate will be credited at the end of the same financial year, and will be adjusted against the final outstanding payable to the supplier within 30 days after year-end.

By the end of the second quarter (30 September 2024), the company has purchased goods worth ₹4 crore, equating to approximately 800 metric tonnes of steel. There are no binding commitments or confirmed orders for additional purchases at this point. However, based on internal forecasts and expected demand, management anticipates surpassing the ₹10 crore (or 2,000 metric tonnes) threshold by the end of the financial year. On this basis, the company begins to accrue the rebate proportionately from the beginning of the year, thereby reducing the cost of purchases and the carrying amount of inventory in its interim financial statements for Q1 and Q2.

State whether it is appropriate to recognize the volume rebate in interim periods before actually achieving the purchase threshold that entitles the company to the rebate as per Indian Accounting Standards.

2. Relevant Provisions

Ind AS 2, Inventories

Para 10 – “The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.”

Para 11 – “The cost of purchase of inventories comprises the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.”

Para B23 of illustrative examples of IAS 34, Interim Financial Reporting:

“Volume rebates or discounts and other contractual changes in the prices of raw materials, labour, or other purchased goods and services are anticipated in interim periods, by both the payer and the recipient, if it is probable that they have been earned or will take effect. Thus, contractual rebates and discounts are anticipated but discretionary rebates and discounts are not anticipated because the resulting asset or liability would not satisfy the conditions in the Conceptual Framework that an asset must be a resource controlled by the entity as a result of a past event and that a liability must be a present obligation whose settlement is expected to result in an outflow of resources.”

3. Analysis

The central issue in this case is whether the company is justified in recognising a 5% volume rebate during interim reporting periods before actually meeting the stipulated purchase threshold of ₹10 crore or 2,000 metric tonnes as specified in the supply agreement. As of 30 September 2024, only ₹4 crore (800 metric tonnes) of steel has been procured, and there are no enforceable purchase commitments in place for the remainder of the year. The company’s decision to accrue the rebate and reduce the cost of inventory is based solely on internal forecasts and anticipated production needs.

Ind AS 2 states that trade discounts and rebates are to be deducted in determining the cost of purchase. However, this deduction is only appropriate when such rebates are either earned or assured, as it directly impacts the measurement of inventory. Premature recognition of such benefits without objective and verifiable evidence can lead to misstated asset values and profits.

Further clarity is provided by Para B23 of the illustrative examples to IAS 34, which explains that volume rebates and similar price adjustments may be anticipated in interim periods only if it is probable that the rebates have been earned or will take effect. This guidance emphasises the requirement that such recognition must be grounded in either past transactions or in contractual certainty. The paragraph also clarifies that anticipated rebates that are discretionary or uncertain in nature should not be recognised, as they do not meet the definition of an asset or liability under the Conceptual Framework.

In the company’s case, the rebate is contingent upon future purchases that have not yet occurred and for which there are no binding agreements or firm purchase orders. While internal projections may suggest the likelihood of meeting the threshold, these estimates alone do not constitute reliable or objective evidence. The rebate is therefore not a present right or obligation but a potential benefit contingent on future events.

Recognising such a rebate prematurely results in an understatement of inventory costs and an overstatement of profit margins in the interim financials, thus impairing the faithful representation and prudence required under Ind AS. This also affects comparability and reliability of the interim results with the annual financial statements, particularly if the anticipated threshold is not eventually met, requiring a reversal of the earlier accounting treatment.

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