Accounting for Goods in Transit under IFRS

Under International Financial Reporting Standards (IFRS), goods in transit must be accounted for correctly when reporting a company's financial position and performance. These goods are assessed according to who owns them, regardless of their physical location. The delivery terms and the transfer of ownership are usually the decisive factors in accounting for goods in transit.

1. Determining ownership:

Which party's balance sheet includes goods in transit depends on the shipping terms. Shipping terms are usually set by the Incoterms (International Commercial Terms):

• FOB (Free on Board):

  • Risk of loss, and usually control, pass to the buyer when the goods are loaded on board the vessel at the port of shipment.

  • While in transit, the goods are regarded as the buyer's property and the buyer includes them in its inventory.

• CIF (Cost, Insurance and Freight):

  • The seller bears the cost of freight and insurance, but, as with FOB, the risk of loss passes to the buyer when the goods are loaded on board the vessel at the port of shipment.

  • Therefore, unless the contract provides otherwise, goods in transit are generally included in the buyer's inventory. The freight and insurance services the seller is obliged to provide may be treated as a separate performance obligation.

2. Accounting entries:

• Seller's perspective:

  • For a sale to be recognised, control and risks must have passed to the buyer (IFRS 15 – Revenue from Contracts with Customers).

  • If ownership still lies with the seller, the goods in transit remain in the seller's inventory.

• Buyer's perspective:

  • If ownership has passed, the buyer must include the goods in transit in its inventory and at the same time recognise a liability (IAS 2 – Inventories).

3. Presentation in the financial statements:

• Goods in transit may be presented in the seller's inventories or in the buyer's inventories, depending on who owns them.

• If the goods are included in the buyer's inventory while in transit, a liability is generally recognised under "trade payables" (if payment has not yet been made).

4. Notes and disclosures:

Under IFRS, significant disclosures about goods in transit must be made in the notes to the financial statements, for example:

• Shipping and delivery terms.

• Critical judgements and estimates regarding the transfer of ownership.

This approach is intended to prevent goods in transit from being misreported and to ensure a fair presentation in the financial statements.