Background:
Certain dealerships (that also sell pre-owned vehicles) offer their customers a guaranteed buy-back amount in order to encourage sales close to year-end; in effect the group offers their customers a minimum “secured return on their investment.”
In terms of the agreement, the dealership guarantees to buy back any undamaged vehicles after three years at an amount slightly below the expected market value at the time of the final sale - calculated as the expected second-hand vehicle market price at the time of the buy-back, less 10%. Insurance is the responsibility of the customer. Therefore they are not making a loss at the time of the buy-back as the buy-back price is calculated and the resale is at or above market value.
Total revenue from the sale of vehicles with a buy-back is recognized on handing over the keys to the vehicle. We do not hold a provision with respect of this guarantee.
What should be the correct treatment in the above case?? What should I advice my Client?
Any suggestions/replies are welcome.
Regards
CAclubindia
