Revenue and expense cut-off

Cut-off means recording each transaction in the period it occurred: revenue when control of the goods or services passes, expenses when the goods or services are received. Errors cluster in the last and first few days of a period — invoices raised early to hit targets, deliveries left unrecorded, supplier invoices that arrive after the books close. Because revenue, cost of sales, inventory, receivables and payables all move together, one cut-off error usually misstates several lines.

Sales cut-off — when does control pass? IFRS 15.38's indicators (legal title, physical possession, risks and rewards, right to payment, acceptance) are often settled by the shipping terms: - Shipping point terms (for example Incoterms FCA or FOB): control generally passes when the goods are handed to the carrier — a sale on the dispatch date. - Destination terms (for example DAP): control generally passes on arrival — goods in transit at year end are still the seller's inventory.

Treat shipping terms as evidence, not the answer. Incoterms allocate risk and costs between buyer and seller; they say nothing about legal title or payment rights, which the contract governs. A seller that ships FCA but, by contract or established practice, replaces goods lost or damaged in transit has kept the risks of ownership and may not have transferred control on dispatch. (Keeping legal title only as protection against non-payment doesn't by itself prevent control passing, IFRS 15.38(b).) Weigh all the IFRS 15.38 indicators together.

Arrangements that look like sales but aren't (yet): - Consignment — goods placed with a dealer who can return them and doesn't have to pay until it sells them. The seller keeps control; revenue arises when the dealer sells to the end customer (IFRS 15.B77–B78). - Bill-and-hold — the customer is billed but asks the seller to keep the goods. Revenue is recognised before delivery only if there is a substantive reason for the arrangement, the goods are identified separately as the customer's, ready for physical transfer, and the seller can't use them or redirect them to another customer (IFRS 15.B79–B82). Custodial services may be a separate obligation. - Cash received in advance is a contract liability, whatever the invoice says.

Purchases and expenses cut-off. Goods received before the year end but invoiced afterwards (goods received not invoiced) must be recorded — as inventory if unsold, as an expense if used — with an accrued liability. Services received but not yet billed are accrued in the same way.

Testing cut-off. Auditors and controllers select documents either side of the year end — dispatch notes, goods received notes, sales and purchase invoices — and check that each was recorded in the right period. They also review credit notes issued after the year end, which can reveal sales that were reversed once the period closed.