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July 1992

International countertrade: is it a sale yet? (The CPA in Industry)

by Kreuze, Jerry G.

    Abstract- Countertrade pertains to sales transactions where commodities are used as payment instead of hard currency. This type of transaction is particularly useful when doing business in markets with currency problems and in economies suffering from hyperinflation. Countertrade transactions, however, present several accounting problems. One of the most serious of these problems is recognition of revenue. Unlike ordinary sales transactions, countertrade is a two-part agreement consisting of both a sale and a purchase which gives rise to the problem of determining when profit is to be recognized. Three options for resolving the revenue recognition problem are considered. These are recognizing revenue at the point of external sale, at the point of counterpurchase, or at the point when the counterpurchased product is sold back.

Countertrade has proven to be a viable method for conducting business in markets with nonconvertible "soft" currencies, in many third world countries, and in hyperinflationary economies, such as in South America. Countertrade transactions create unique accounting problems that must be addressed. Current authoritative pronouncements and GAAP offer limited help in accounting for countertrade transactions.

The Countertrade Transaction

One form of international countertrade is when one company effectively barters its goods for those of another company; that is, each company receives new goods or services as direct payment for the other's products. No currency changes hands, with the possible exception of "boot." This method combines the sale with the purchase, so the seller receives exportable goods as direct compensation for its goods or services. The practices of Pepsico, R. J. Reynolds, and to a certain extent Coca-Cola, are examples of this form of countertrading.

Perhaps the most frequent form of international countertrade occurs when purchases are required to offset sales. A two-step process then exists: first a sale followed by a subsequent purchase to counterbalance it. The sale results in the firm receiving a local currency as payment. While a sale has occurred, the entire "macro" sale has not been completed, since the firm does not have a hard currency exchangeable outside the country. The firm must now purchase a local product with the local currency to counterbalance its initial sale. This step completes the countertrade agreement, but the firm must still export and resell that product in another country to obtain a convertible currency. This latter form of international countertrade creates some particular accounting implications. Figure I depicts this form of international countertrade (the sale for local, soft currency, with a required offsetting purchase) - Part A presents one subsidiary, while Part B illustrates two subsidiaries in two different countries.

Revenue Recognition Alternatives

According to current GAAP, profit ordinarily shall be recognized at the time a sale in the ordinary course of business is effected, Accordingly, revenues shall ordinarily be recognized at the time a transaction is completed, with appropriate provision for uncollectible accounts. A transaction generally is not considered a sale unless an exchange has taken place, a liquid asset has been received, and the earnings process is complete or virtually complete. Since countertrade represents both a sale and a purchase requirement integrated into one agreement, the sale really cannot be considered independent of the purchase. Since the countertrade transaction is a two-part process, at what point should revenue be recognized? And for that matter, which subsidiary should recognize the profit, and for what amount? Three revenue recognition possibilities, appear possible: 1) at the point of external sale of the original product, 2) when the locally manufactured goods or services are purchased, thus completing the obligation under the countertrade agreement, and 3) after the locally manufactured goods are sold and a hard currency is received.

At Point of external Sale. This revenue recognition option appears most appropriate for the subsidiary located in the soft currency country, but not for the parent corporation. The soft currency received would be the subsidiary's functional currency and be considered a liquid asset. However, that currency may not be a liquid asset for the parent corporation. Currencies publicly traded on an international market, such as the Deutsche Mark or Japanese Yen, would be considered liquid. A foreign currency, that is not traded on a currency market and is only liquid in the country in which it is obtained, is not liquid to the parent located in another country.

At Point of Counterpurchase. If revenue is not recognizable at the point of the original sale for the parent corporation, does the completing of the purchase requirement fulfill the revenue recognition criteria? At that point (the use of a foreign soft currency to purchase locally manufactured goods for export), the parent corporation has ownership of goods purchased for resale, as compensation for the original goods sold. Since goods held for sale are generally not considered a liquid asset, the criteria for revenue recognition seemingly have not yet been met for the parent corporation.

At Point of Resale of Counterpurchased Product. This appears to be the most appropriate revenue recognition point for the parent corporation. A liquid asset has not been received until this point. The parent corporation cannot generally determine the amount of profit or loss realized until the counterpurchased product is sold for hard currency for three reasons: 1) the price movements of goods in another country often cannot be predicted, 2) the parent company may not know in which country the counterpurchased goods will he sold, and 3) the unknown of exchange rates, caused by daily exchange rate fluctuations.

Accounting for Countertrade

Although the preceding discussion suggests that revenue recognition for the parent corporation man, not occur until the resale of the counterpurchase goods, transactions must be recorded a each exchange that led to the final sale For the subsidiary (assuming a separate entity), the countertrade transactions are a series of "business as usual" entries The subsidiary would recognize revenue at the point of sale for the reasons state earlier. The ensuing purchase of locally procured goods could be treated as purchase of new inventory, which is followed by another sale.

However, for the multinational parent corporation, a number of considerations exist. if the sale of the original goods is not considered a sale, then what is it? What type of transaction occurs at the purchase of local goods, and again what entry should be recorded, if any? Should any gain or loss be recognized from either transaction? Effectively, an exchange of inventory, has occurred at both the point of sale and the resulting purchase of local goods. The soft currency, obtained from the original sale becomes an inventory of cash. This local currency, is held until it is "sold" for locally manufactured goods. These goods are then held until sold for a genuinely hard currency in another country. Consequently, the exchange at original external sale and the exchange for locally manufactured goods both could reasonably be considered purchases of inventory for the parent corporation.

Exchange rate fluctuations can further complicate countertrade transactions. That is who should benefit/pay, for exchange rate fluctuations - the parent or subsidiary? The presence of a second subsidiary, similar to Part B in Figure 1, also adds complexity. To illustrate, assume the U.S. parent corporation ships goods to Czechoslovakia (Subsidiary #1). Subsidiary #1 sells those goods, counterpurchases local sourced food stuffs, and ships those goods to Subsidiary, #2 located in Germany. Subsidiary, #2 then sells those food stuffs for D-marks. Those D-marks are exchanged for U.S. Dollars and remitted to the U.S. parent corporation. Numerous considerations must be addressed. First, transfer prices must be established between the parent corporation and Subsidiary #1 and between Subsidiary #1 and Subsidiary #2. Second, the transfer prices established may have tax implications since the subsidiaries may be taxed at the local country level. Tax minimizing strategies then become important. Finally, a determination at what point in the countertrade transaction should revenue be recognized for the parent, subsidiary #1 and subsidiary #2 must be reached. That determination is partially determined by the transfer prices established.


Countertrade transactions create unique accounting problems. Many accountants must deal with these issues on a daily basis, without authoritative guidelines for definitive support. As countertrade becomes more common, these problems will become more widespread.

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