How to account for demonstration goods
A question many entities face is how to properly account for goods or own products they use for demonstrations. The new Interpretation of the National Accounting Council I-51 provides guidance on how to proceed when classifying demonstration goods as fixed (non-current) or current assets.
In practice, it is common that an entity displays goods (or uses them for demonstration) for a certain period before selling them. The question then arises whether such goods or products should be classified as inventories or fixed assets.
Generally, entities are required to keep accounts so that the financial statements prepared on their basis give users a true and fair view of the subject matter of the accounting and of the entity's financial position. For this reason, goods or products used for demonstration must be recognised based on their actual function and length of use.
If the goods are intended for long-term demonstration to customers, i.e. expected to be displayed/used for demonstration for more than one year or for a period longer than the sales cycle of the goods (if the goods’ sales cycle is longer than one year), they should be recognised as fixed assets if they also meet the valuation threshold set by the entity. The entity shall then depreciate such fixed assets according to their expected useful lives.
On the other hand, if the goods are primarily intended for sale and their demonstration is only part of the sales process, they should be recognised as inventories throughout their display time. The Council’s interpretation further states that the mere registration of the goods in the relevant register (necessary for their demonstration) is not a reason for reclassifying the goods from inventories to fixed assets.
In classifying goods, the internal valuation threshold should also be borne in mind. If this threshold is not exceeded and the goods are expected to be used for demonstration for more than one year, they shall be expensed at the time when the decision to use them for demonstrations is made (accruals/deferrals may be considered).
An entity should always be able to support its intention to use the asset in a certain way and provide all relevant documents. If the intention is subsequently changed, this is not a misclassification of the asset, and the change should not be made retrospectively.