Purchase price on a blocked account: posting
February 2021 – In mid-December, the Accounting Standards Board (CBN/CNC) issued a notice on the entries to be made when parties enter into a transaction and the purchase price is paid into an escrow account.
An escrow account
Sometimes a transaction (purchase/sale or service) depends on the fulfillment of a condition. The example used by the CNC is the purchase of a machine on the condition that a permit to install the machine is obtained.
For the security of both parties, the purchase price is placed in a blocked account. The customer can be sure that he will not lose his money in case of a delivery problem. The supplier is sure to be paid if he fulfills his part of the contract.
There are three possible hypotheses: the blocked account is a) an account of the client, b) an account of the supplier or c) an account of a third party (in practice, often a notary's account).
The account is in the name of the client
If the account is in the customer's name, the purchase price does not, strictly speaking, disappear from the customer's assets. Of course, it can no longer be included in the disposable assets. The amount is transferred from the account "Credit institutions" to the account "Miscellaneous receivables" (account 416).
Although the purchase price has not left the customer's assets, the customer can no longer dispose of this sum. Once the conditions have been met, the supplier can demand the amount. According to the CNC, this must be expressly mentioned in the appendix.
On the supplier's/seller's side, not much happens with regard to property law. As long as the condition is not fulfilled, the delivery has not yet taken place and the sum has not yet been booked to the supplier's account.
However, the CBN/CNC requires that the obligation to sell be disclosed in the notes to the financial statements.
If, for example, it concerns a machine that was previously recorded in the vendor's balance sheet as property, plant and equipment, it will have to be transferred to "Other property, plant and equipment" because it will soon be taken out of operation. This must also be expressed in the accounts.
The account is in the name of the seller
If the buyer pays the purchase price into a blocked account in the seller's name prior to the acquisition of the asset, this sum can no longer appear in the buyer's balance sheet. In itself, the entry to be made is the same as in the first case. Given the special nature of this transaction, the claim must be mentioned in the appendix.
The seller, for his part, receives a sum of money, but on a blocked account that is "unavailable". The sum cannot yet be posted to the account "Credit institutions: Current account" (account 5500).
As in the first case, the seller must transfer the fixed asset to "Other tangible fixed assets" because it is no longer permanently allocated to the seller's activities.
The blocked account is in the name of a third party.
In concrete terms, this is a situation where the buyer and seller reach an agreement and the buyer already pays the sum to the intermediary (often a notary). This third party pays the money once the condition has been met.
As in assumption 2, the funds paid no longer appear on the buyer's balance sheet. The sum must therefore be transferred to account no. 416 (Miscellaneous claims) and this claim must be explicitly mentioned in the appendix.
The transfer to the blocked account of the third party has no impact on the seller's balance sheet. Furthermore, until the condition is fulfilled, the seller is in principle not obliged to deliver any goods/services.
As in assumption 1, however, the CNC considers that the transaction should be disclosed in the notes to the financial statements, the asset should obviously also be transferred to the "Other property, plant and equipment" account because it is no longer used on a permanent basis for the seller's activities.
Finally, there is the third party. In the case of a notary, the funds that the notary receives in a blocked account must, legally speaking, be separated from the notary's own assets. These sums are therefore not included in the notary's (company's) balance sheet. Once again, mention must be made in the "Off-balance sheet rights and commitments" section of the annex of assets and securities held for the account or at the risk and profit of third parties.
A logical history
After all, the CNC's reasoning is quite logical. If the purchase price is blocked on an account because there is a condition to be fulfilled, the account holder cannot take the amount for granted pending the fulfilment of the condition. That is why the underlying transaction must always be mentioned in the schedule.
