Travis Perkins plc – Annual report – 31 December 2019
12. Supplier income
Supplier income comprises fixed price discounts, volume rebates and customer sales support.
Fixed price discounts and volume rebates received and receivable in respect of goods which have been sold are initially deducted from the cost of inventory and therefore reduce cost of sales in the income statement when the goods are sold. Where goods on which the fixed price discount or volume rebate has been earned remain in inventory at the year end, the cost of that inventory reflects those discounts and rebates.
The Group receives customer sales support payments that are made entirely at the supplier’s option, that are requested by the Group when a specific product is about to be sold to a specific customer and for which payment is only received after the sale has been completed.
All customer sales support receipts received and receivable are deducted from cost of sales when the sale to the third party has been completed, ie when the customer sales support payment has been earned.
Supplier income receivable is netted off against trade payables when there is a legally binding arrangement in place and it is management’s intention to do so, otherwise amounts are included in other receivables in the balance sheet.
Other supplier income relates to customer sales support received in respect of sales of specific products to specific customers which is included in the income statement when the relevant sale occurs, ie when all conditions for it to be earned have been met.
Supplier income balances included within the Group balance sheet are as follows:
Inventories, which consist of goods for resale, are stated at the lower of average weighted cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price less the estimated costs of disposal.
Key estimate – Cost of inventories
In determining the cost of inventories the Directors have to make estimates to arrive at cost and net realisable value.
The Group has entered into a large number of rebate and fixed price discount agreements, the effects of which are offset against the gross invoice price paid for goods. As explained in note 12 setting out the estimates made in respect of supplier income, the calculation of the value deferred into stock is complicated due to the number, nature and structure of the agreements in place. However, the Group has a well tested methodology that is consistently applied. The Directors believe that the £305m deduction from the gross invoice cost of stock (2018: £260m) is appropriate.
Furthermore, determining the net realisable value of the wide range of products held in many locations requires judgement to be applied to determine the likely saleability of the product and the potential price that can be achieved. In arriving at any provisions for net realisable value the Directors take into account the age, condition and quality of the product stocked and the recent trend in sales.
Audit Committee report (extract)
Significant issues related to the financial statements (extract)
The Audit Committee has assessed whether suitable accounting policies have been adopted by the Group and whether management has made appropriate judgements and estimates.
The table below sets out the key judgement areas associated with the Group’s financial statements for the year ended 31 December 2019 that were considered by the Audit Committee. This is not a complete list of all accounting issues, estimates and policies, but includes those which the Committee believes are the most significant.
In reaching its conclusions, set out in more detail in the table, the Committee considered papers and explanations given by management, discussed each matter in detail, challenged assumptions and judgements made and sought clarification where necessary. It reviewed and discussed any internal audit reports in respect of the matters under consideration and the Committee also received a report from the external auditors on the work undertaken to arrive at the conclusions set out in their audit report on pages 122 to 130 and had the opportunity to discuss it with them in depth.