A company has sold part of its assets, however, the actual cash will only be received after the annual closing. So, is there a way to account for this in the 2018 accounts? In particular, when the gain on sale is significant, can the gain be accrued? Sufficient documentation exists to prove that the sale will occur.

Core of the issue: timing of revenue recognition

According to accounting standards, gains from asset sales should generally be recognized when the transaction is completed and it is probable that economic benefits will flow to the entity. In this case, the assets have been sold, but cash has not yet been received, and receipt is deferred until after the annual closing. This raises a question about the timing of gain recognition: should it be recognized in 2018 (the year of the sale) or deferred to the year of actual receipt?

Feasibility analysis of accrual

The accrual accounting principle allows for the recognition of revenues and expenses when the substance of the transaction occurs, even if cash has not yet been received or paid. The key is whether the conditions for revenue recognition are met:

  • It is probable that the economic benefits associated with the transaction will flow to the entity;
  • Revenue and costs can be measured reliably;
  • The transaction has been substantially completed, i.e., control of the assets has been transferred.

In this case, the company has sold the assets, and there is sufficient documentation to prove that the sale will occur, which suggests that the transaction may have met the above conditions. However, the delay in cash receipt until after the closing may affect the assessment of 'probable inflow,' but it is not a decisive obstacle—as long as the buyer's credit risk is controllable and the contract terms are clear, accruing the gain is generally permissible.

Materiality considerations

Since the gain on sale is significant, management needs to carefully assess whether to accrue it. Materiality requires more rigorous evidence and disclosure. If the accrual is inappropriate, it could lead to material misstatements in the financial statements. Therefore, it is recommended to consult professional accountants and review the contract terms, the buyer's ability to pay, and whether there are any uncertainties (such as returns, price adjustments, etc.).

'Sufficient documentation proving that the sale will occur' is key support for the accrual, but it is necessary to ensure that the documentation covers all key terms and that there are no significant uncertainties.

In summary, it is possible to accrue the gain on sale in the 2018 accounts, provided that the revenue recognition criteria are met. It is recommended to complete an internal assessment before the annual closing and communicate with the auditors to ensure compliance.