Question

Hi,

Can you teach me how to answear product financing arrangement?

Answer 1

THE TRANSACTION RELATING TO INVENTORY WHICH ARE IN THE NATURE OF THE FOLLOWING POINTS ARE FINANCING ARRANGEMENT.

• A TRANSACTION IN WHICH THE SELLER AGREES TO REPURCHASE THE ITEM SOLD OR AN ESSENTIALLY IDENTICAL ITEMS.
• A TRANSACTION IN WHICH THE SELLER COMMITS TO HAVING A THIRD PARTY PURCHASE THE ITEM AND THEN AGREES TO ACQUIRE THE SAME FROM THE THIRD PARTY
• THE SELLER CONTROL HOW THE ITEM SOLD ARE DISPOSED OFF.

WHEN A SELLER PROVIDE THE RESALE PRICE GUARANTEE AND AGREE TO PAY ANY SHORT FALL IN TE PRICE AS WHICH AT WHICH HE SOLD THE GOODS TO RESELLER AND PRICE AT WHICH RESELLER IS SELLING GOODS TO THIRD PARTY.

LETS UNDERSTAND IT WITH EXAMPLE-

CASE 1

PARTY A HE IS THE SELLER HE SELLS THE GOOD TO PARTY B. HE REPURCHASE THE GOOD SOLD TO PARTY B.

PARTY B HE IS THE RESELLER HE RESELLS THE GOOD PURCHASED FROM THE PARTY A TO PARTY A.

IF THERE IS ANY PRICE DIFFERENCE BETWEEN THE SALE, PURCHASE AND REPURCHASE IS COMPENSATED BY PARTY A.

CASE 2

PARTY A HE IS THE SELLER HE SELLS THE GOOD TO PARTY B FOR $100

PARTY B HE IS THE RESELLER HE SELLS THE GOOD PURCHASED FROM THE PARTY A @ $100 TO PARTY C @ $80, AS ARRANGED BY PARTY A.

PARTY C HE IS THE THIRD PARTY HE PURCHASED GOODS FROM PARTY B @ $80 AND SOLD THEM TO PARTY A AGAIN.

PARTY A WILL COMPENSATE THE SHORT FALL OF $20 TO PARTY B AND THIS TYPE OF ARRANGEMENT IS CALLED FINANCIAL ARRANGEMENT.

IF WE TALK IN TERMS OF ACCOUNTING TREATMENT FOR THE SAME THEN IT IS TREATED AS A BORROWING ARRANGEMENT AND NOT A TRANSACTION OF SALE.

THUS THE SELLER HAVE THE OWNERSHIP OF THE GOODS AND THE LIABILITY FOR ITS RE PURCHASE OBLIGATION.

THE RECORDING OF REPURCHASE OBLIGATION AS A LIABILITY IN BOOKS OF ACCOUNT IS DONE WHEN HE RECEIVE THE PROCEEDS FROM INITIAL FINANCING TRANSACTION( IN ABOVE EXAMPLE PARTY A WILL RECORD LIABILITY WHEN PARTY B MAKE THE PAYMENT) AND IF A THIRD PARTY IS INVOLVED THEN THE LIABILITY WILL BE RECORDED WHEN THIRD PARTY PURCHASE THE GOODS ( WHEN PARTY C PURCHASE FROM PARTY B).