The legal obligations and risks that come with preparing contracts to buy and sell and trade in multiple jurisdictions and currencies are many and varied.
Your accounts team is likely to need legal support.
Protecting your organisation’s financial performance
Multiple jurisdictions, exchange rates, payment terms and the tax implications of all the above. These are just a few of the factors that can make buying and selling complex for large international organisations.
So, to help you understand and navigate the accounting aspects of contracts, risk and other business disciplines, here is your checklist of accounting considerations.
If you do not understand any of these terms then ask your accountants - if they cannot explain them clearly then they and you both need to look them up and learn them!
Contracts - selling
- Where are your customers and which jurisdictions does your organisation supply its products or services in?
Consider:
- Permanent establishment risk;
- Taxes;
- Complications in agency;
- Triangulations issues; and
- Currency control.
- Complex structures:
- Cost structures and your ability to re-aggregate information.
Contracts - purchasing
- Location of suppliers.
- "Double dip" duty transactions.
Risk management
- Credit risk for suppliers and customers.
- Business continuity and diversification of supply.
- Currency risk (matching sales and purchases).
- Continent liabilities (liability caps/warranties).
- Incoterms.
- Retention of title clauses.
- Ability to supply.
Profitability
- Conditional/unconditional rebates
- Accounting and control.
- Impact of profitability of met.
- Settlement mechanism for rebates (settlement, deduction, cash, product/service).
- Incomplete information or assumptions-based pricing.
- Indexation (for supply contracts only).
- Warranties (without offset from suppliers).
- Long term contracts with inflexible pricing conditions.
- Complex and uncosted administrative procedures.
- Recovery of bid costs.
- Remuneration for proof of concept.
- Payment terms.
- Buy-backs.
Cash flow management
- Payment terms (matching).
- Staged payments.
- Inventory holding requirements - avoid as much as possible.
- Currency matching.
- Retentions vs guarantees (prefer guarantees).
Accounting issues
- Revenue recognition, including rebates.
- On/off balance sheet.
- Service contracts incorporating asset provision.
- Turnover vs financing income.
- Inventory valuation, such as try-and-buy.
- Volume discounting where the volume discount is retroactive to volumes already bought/sold rather than only affecting incremental volume above the discount threshold.
Other issues
- Assignment.
- Corporate governance (who can sign) and tax consequences.
Conclusion
Whether buying or selling, use this checklist to help you get your contracts right and account for exchange rates, tax and other issues that affect cash flow and, ultimately, profitability. And, if there’s anything you’d like us to add to this page, do let us know.