Technical Query - Presentation of Sales Commissions

[kchee]

Background: Accounting background, currently interning in a manufacturing company in their accounting department.

Hey everyone,

I'm in the midst of preparing a manufacturing company's financial statements (IFRS based). The company manufactures machines for sale. For its sales, the company pays a certain percentage of sales commission to its sales staff for every machine sold.

All this while, I've understood and seen in school/ real life examples that sales commissions appear somewhat later in the income statement, under perhaps the "Operating Expenses" segment. However, my boss insists that these commissions be subtracted off directly from the total sales figures. Eg. if a machine's price is $100, with a 20% sales commission to be paid, he wants the presentation of the sales figure in the income statement to be $80 immediately. His rationale is that it is a 'fairer representation to the investors' as a machine sold technically only brings in $80 of revenue to the company after payment of commissions.

Anyone happens to have any advice on this? I've so far only seen IFRS 1 which dictates that no offsetting of revenue and expenses are allowed in financial statements, which seems to be what he wants me to do.

On that note, is there any IFRS that governs how line items in a financial statement are supposed to appear? I.e. how do line items be classified under 'other operating expenses' or 'COGS' and such

 

[kirby]

What to do well let's see where we are:
1. You've already found the exact guidance which covers your situation; no offset of revenue and expense is allowed
2. Apparently you've already discussed the issue with boss as boss has given his/her reply that netting is a "fairer" representation.
3. You are an intern.

SO what's for you to do? I suggest follow the boss's guidance. If the financials are audited then it is the auditors' responsibility to correct the netting. If financials are not audited, then it is possible that the boss may have previously informed the investors that the commissions are netted. You are not in a position to know this. Your ethical responsibility is to not engage in fraud. This is not fraud just everyday common ignorance. What is great is you know the correct technical presentation method and have brought up the issue with the boss but there is no need to go further and "fall on your sword" for it.

 

[kchee]

What to do well let's see where we are:
1. You've already found the exact guidance which covers your situation; no offset of revenue and expense is allowed
2. Apparently you've already discussed the issue with boss as boss has given his/her reply that netting is a "fairer" representation.
3. You are an intern.

SO what's for you to do? I suggest follow the boss's guidance. If the financials are audited then it is the auditors' responsibility to correct the netting. If financials are not audited, then it is possible that the boss may have previously informed the investors that the commissions are netted. You are not in a position to know this. Your ethical responsibility is to not engage in fraud. This is not fraud just everyday common ignorance. What is great is you know the correct technical presentation method and have brought up the issue with the boss but there is no need to go further and "fall on your sword" for it.

Great Kirby, thanks a bunch for the help!

 

[Fidget]

It sounds as if your boss is misinterpreting IAS1. Offsetting is allowed under it if doing so makes the presentation easier to understand. The classic example of it being gains/losses on foreign currency transactions being presented as a net figure. But it isn't allowed if the result can be misleading - such as with revenue or bank accounts where overdrafts exist.

 

[alexm]

The measurement principles for revenues are determined by IFRS 15 (see IFRS 15.47):

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes).

In short, the revenue reflects the relationship with the customers. E.g. customer discounts would fall into this definition. However, it excludes deductions for employee benefits. Agent commissions are a part of "Sales & Marketing" expenses below "Net sales" (as you've correctly mentioned).

It's not a matter of offsetting or not offsetting under IAS 1, it's a matter of what constitutes a "revenue" in the sense of IFRS 15.

If the machine costs $100 for the customer, then the revenue agreed with the customer is $100. The transaction price with the customer is not affected by existence or nonexistence of a commission agreements between the company and the sales agents.