A Presentation On Case

Study Of Accounting Issues

Of
Platinum Trends
Submitted By :
Prateek Goyal
Anshul Bansal
Dinesh Jindal
Prince Mandeep
Manish Meena
Summary Of The Case
Platinum Trends which was established in 2003 ,
became a leader in Jewellery industry , Giving tough
competition to national & international jewellers.
With a number of Awards for excellence in design ,
innovation and branding , it has constantly moved
ahead its peers.
The company has a steady policy of billing its
dealers on delivery of products and immediate revenue
recognition.
The company also allows its dealers to return any
unsold product throughout the year and the sales
returns are accounted for during the year.

The following table gives the companys sales and returns for
years 2006,2007,2008 :

Year Sales Sales Net Sales Net Profit
returns (in millions)
20X6 6412 1375 5037 2015

20X7 7907 1952 5955 2692

20X8 9109 2066 7043 3505
In June 2008, Sameer jain , an analyst questioned the
companys accounting for sales returns and presented his
report in an equity research paper as follows :

The company accounts for all actual returns but it does not account for
returns that are probable as of the balance sheet date. What this means is
that product sold in a year maybe returned in the following year. This
would increase the revenue in the year of sale and reduce the revenue in
the year of return.
Industry trends suggest that sales returns exceed 20% therefore delay in
recognition of returns could result in overstatement of revenue and allow
the company to move its revenue from one period to another.
In view of the above , we recommend SELL on Platinum trends shares.
Platinum Trends issued following press release in response to
sameer jains research report :
The company recognizes revenue in accordance with 2 major
conditions in the accounting standards -

A) The seller of goods has transferred to the buyer the
significant risks and rewards of ownership of the goods and
the seller retains no effective control of the goods transferred
to a degree usually associated with ownership.

B) No significant uncertainty exists regarding the amount of
the consideration that will be derived from the sale of the
goods.

The Company explained that it has complied with both
these conditions while there is some probability that the goods
may be returned by the dealers, the amount of consideration is
certain.

Once the company sells the products, the ownership passes
to the dealers. Hence company has no control over the goods.
Therefore it cannot record the return of such products.

The company accounts for returns from its dealers
immediately and refunds the amount promptly, however
accounting for expected returns as contrasted with actual
returns , is fraught with risk. That kind of accounting would be
based on estimation and not on facts.
The company records its deep disappointment over the
negative research report.
Analyst's Comments
The company accounts for all actual returns , it does
not account for returns that are probable as of the
balance sheet date.
Products sold in a year may be returned in the
following year, because they are no longer the flavour
of the season.
This would increase the revenue in the year of the sale
but would decrease the revenue in the year of return.
Companys delay in recognition of returns could result
in overstatement of revenue and allow the company to
move its revenue from one period to another.
Companys Comments
The company recognises revenue in accordance
with the 2 major conditions in the accounting
standards:
1. The seller of the goods has transferred to the
buyer the significant risks and rewards of
ownership of the goods and the seller retains no
effective control of the goods transferred to a
degree usually associated with ownership.
2. No significant uncertainty exists regarding the
amount of consideration that will be derived
from the sale of the goods.
The company has complied with both these conditions.
While there is some probability that the goods may be
returned by our dealers, the amount of consideration is
certain.
Once the company sells the products the ownership
passes to the dealer and company has no control over
goods.
Therefore, company cannot record return of such
products.
In our view, accounting for expected returns , as
contrasted with actual returns, is fraught with risk. This
kind of accounting would be based on estimation and not
on facts.
Our take on these comments
According to us, the claims made by Altus Securities
are true that Platinum Trends is not following
accounting principles properly and this may lead to
overvaluation of the company and many other flaws.
The points given in response of these allegations by
Platinum Trends are valid but the reason given for not
accounting of expected returns is not justified at all.
Also, According to the International Accounting
Standard 18, we have a few points as mentioned on
next page:

International Accounting Standard 18
Revenue
If an entity retains only an insignificant risk of ownership, the
transaction is a sale and revenue is recognised.
For example, a seller may retain the legal title to the goods
solely to protect the collectability of the amount due. In such a
case, if the entity has transferred the significant risks and
rewards of ownership, the transaction is a sale and revenue is
recognised.
Another example of an entity retaining only an insignificant
risk of ownership may be a retail sale when a refund is offered
if the customer is not satisfied.
Revenue in such cases is recognised at the time of sale
provided the seller can reliably estimate future returns and
recognises a liability for returns based on previous experience
and other relevant factors.
As the sales returns generally exceeds 20% of
sales , Platinum Trends can in no way neglect
the sales returns in their accounting as it will
have a huge impact on the revenue and other
accounts.
Hence a new policy needs to be formulated for
Platinum Trends which may take into account
the return sales too.

Accounting Policy For Revenue
Recognition Including Sales
Returns
If an entity retains only an insignificant risk of
ownership, the transaction is a sale and revenue is
recognised.
Revenue in such cases is recognised at the time of sale
provided the seller can reliably estimate future returns
and recognises a liability for returns based on previous
experience and other relevant factors.
The ability to make a reasonable estimate of the amount
of future returns depends on many factors and
circumstances that will vary from one case to the next.
However, the following factors may impair the ability
to make a reasonable estimate:




Factors that may impair the ability to
make a reasonable estimate
a) The susceptibility of the product to significant external factors,
such as technological obsolescence or changes in demand.
b) Relatively long periods in which a particular product may be
returned
c) Absence of historical experience with similar types of sales of
similar products, or inability to apply such experience because of
changing circumstances, for example, changes in the selling
enterprise's marketing policies or relationships with its customers
d) Absence of a large volume of relatively homogeneous transactions

The existence of one or more of the above factors, in light of the
significance of other factors, may not be sufficient to prevent
making a reasonable estimate; likewise, other factors may preclude
a reasonable estimate.
We are given the data of the companys sales and
returns for years 2006,2007,2008 :

Year Sales Sales Net Sales Net Profit
returns (in millions)
20X6 6412 1375 5037 2015

20X7 7907 1952 5955 2692

20X8 9109 2066 7043 3505

We can clearly see from the data that the sales return in % terms of
total sales is as follows:

Year Sales Returns(% of total sales)
20X6 21.44
20X7 24.68
20X8 22.68

As we see that the sales returns are continuously lying in the bracket
of 20-25% ,the company should account for expected sales returns
of an average of 22.5% each year and should place adjustment
entries accordingly if the returns deviate from the expected value.
Solution
So there should be a new accounting policy in
which Revenue is recognised at the time of
sale and a liability for returns based on
previous experience is recorded which in this
given case comes out to be approximately 22.5
% of sales.