Possession is almost always construed as proof of ownership. “I possess and therefore I own” has proven in many cases to be a generally good measure of ownership. I say “generally” because such is not always right, especially in the field of accounting.
In accounting, possession of a physical asset does not always lead to a corresponding peso registered in the balance sheet. Take the classic example of a short-term rental car. You may have it in your possession, drive and parade it all you want, but at the end of the rental period, the car is still not yours and you are obliged to return the car. The payments you made will find its way to your usually long list of expenses and never to your sometimes very short list of assets.
Let’s take a look at a couple of examples to illustrate that possession doesn’t necessarily translate to ownership, at least for accounting purposes.
Max and Paul are still in possession of the 1967 Ford Mustang Shelby that they sold to Amara before the year-end. Upon noticing that it’s still sitting idly in their warehouse loading dock, they instructed their accountant to reinstate the asset in their balance sheet and took the vintage car for a torrid spin. Their argument was that it is still in their possession, it is still theirs, so they should be free to take it for one last ride.
Amara, understandably, was furious! She was on a cruise ship for a grand New Year bash when she learned of what happened. For her, the sale was completed, she made full payment and therefore, the vintage car is definitely hers. Listening to the arguments of both sides, who is the rightful owner now? In whose balance sheet should the precious car be reported? We already established at the beginning of the article that mere possession does not guarantee ownership, so what impact does the buyer’s full payment have on the ownership of the car?
In answering these questions, we have to go back to the substance of their sales agreement, written or otherwise. For accounting purposes, we only have to focus on the stipulated manner of delivery, or the mode of transferring ownership. In accordance with the agreement, did delivery occur upon putting the car securely in the loading dock? Have Max and Paul been relieved of their contractual obligation even before Amara’s pick-up? Most of the time, the concept of delivery coincides with the transfer of risks and rewards.
If, for example, due to a fortuitous event, the warehouse was burned to the ground, along with the vintage car, who will bear the loss? Is there an expectation for Max and Paul to compensate or reimburse Amara? The answers should point us to the rightful owner.
The above story and analysis are also related to a common practice among trading companies, called “bill and hold.” It is a situation where a sale is consummated by an agreement that the seller keeps possession of the item for future delivery to or pick-up by the buyer. Certain requirements need to be fulfilled in order for the transfer of ownership to occur in accordance with International Accounting Standards (IAS) No. 18. Among others, all of the following criteria must be met:
a) The buyer must have taken title to the goods and accepted billing.
b) It must be probable that delivery will take place.
c) The goods must be on hand, identified and be ready for delivery to the buyer at the time the sale is recognized.
d) The buyer must specifically acknowledge the deferred delivery instructions.
e) The usual payment terms must apply.
Under a qualified bill and hold arrangement, while the seller retains possession of the items sold, ownership is already transferred to and for the account of the buyer, along with the risks and rewards associated with the items sold.
To have but not to own
David impulsively bought a new delivery van for his shoe stores. A few weeks later, he realized he needed the money to finance the arrival of new stocks in time for the holidays. Instead of getting a new loan from the bank, he approached his friend, Sam, and offered to sell his van at a very attractive price with the side agreement that David will be allowed to immediately rent it back for a period of 12 months.
Sam, being a wise businesswoman, agreed to the deal and paid the selling price in full. This is a basic example of a “sale and leaseback” transaction. Under IAS No. 17, a sale and leaseback transaction arises when a vendor sells an asset and immediately re-acquires the use of the asset by entering into a lease with the buyer.
Under this arrangement, a sale is completed and ownership is transferred. While David is still in possession of the delivery van, it is only by virtue of the rental arrangement and not because he retains title or ownership.
On both examples, point and manner of delivery are critical. Risk and rewards should be completely transferred for the ownership to be established.
And as colorfully illustrated, in the wonderful world of the mighty accountants, there are many ways by which assets can be seemingly yours, but not truly. In accounting, as in life, those who possess the most are sometimes the ones who own the least.
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Aldie P. Garcia is a Partner from Assurance, Markets Lead for Priority Targets, Lead Partner for Branch Operations and the PwC Experience Leader of Isla Lipana & Co./PwC Philippines. Email your comments and questions to firstname.lastname@example.org. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
ALDIE P. GARCIA