Accounting for Buying Commissions (#324)

This episode covers the accounting treatment for buying commissions paid by an importer to an agent on goods imported. A buying commission is a fee paid by an importing buyer to its agent for the service of representing it abroad in the purchase of goods. Representation might involve searching the market for the best available prices, negotiating with suppliers, conducting quality inspections, and making payments on behalf of the buyer.

There is nothing in the accounting standards that specifically covers buying commissions. On the other hand, there’s a great deal about it in the rules and regulations for any country that charges a customs duty on the value of imported goods. The basic question from a customs duty standpoint is whether the value of the buying commission is part of the purchased goods, and so gets to be whacked with a customs duty. The importer obviously wants to avoid the duty, and so tries to keep the buying commission separate from the stated value of the goods.

From an accounting perspective, we don’t care about all the arguments pertaining to customs duties, since they all vary by country anyways. Instead, we can rely on the accounting rules pertaining to the cost of goods sold – which we just happen to have covered in the last episode. The main rule is that an expense is included in the cost of goods sold if it’s clearly a cost of the goods that are sold. Therefore, the key question is, could the importer obtain the imported goods without paying the buying commission? The answer is – no, it could not, because the agent will not represent the buyer if it is not paid this commission.

Also, the buying commission is usually a percentage of the goods being purchased, which closely ties the expense to the cost of goods sold. This also means that the commission can be considered a direct cost, because it’s only incurred if goods are purchased. Being a direct cost is a prime determinant of being classified within the cost of goods sold. So there you have it, cost of goods sold all the way.

What is the presentation of this expense in the income statement? The answer is, within the cost of goods sold section. Unless you’re breaking out lots of line items on the income statement, it’s probably going to be aggregated into the main cost of goods sold line item.