Accounting For Take Or Pay Agreement

The damage to the seller, if the buyer does not withdraw the goods, may be in the nature of unspecified general damage, or may be contractual liquidation damages, but in most cases they do not constitute the total contract price for the unspecified quantity. When recovering general damages, the seller is often required to take steps to reduce his losses, which may require a seller to resell the merchandise not removed by the buyer and to attribute the proceeds of the resale to the seller`s claim. In a take-pay contract, the seller is not subject to such a reduction or resale obligation. A take-or-payment clause is essentially an agreement by which the buyer agrees to either: (1) take and pay the contract price for a minimum contractual amount of the goods per year (the “TOP”); or (2) to pay the contract price applicable for this amount of TOP if it is not collected in the applicable year. Therefore, the buyer`s obligation is often referred to as an “alternative” — it can be filled in one of the two ways described. In most cases, the obligations to take or pay are set on an annual or contractual basis, and we start from an annual basis in this article, but the principles of take-or-pay can apply over different periods, with quarterly and monthly commitments to be paid. When this type of “take-or pay” clause is expressed on shorter maturities, it is also commonly referred to as a “minimum wage” or “minimum bill obligation.” After the applicability of In-As/IFRS to these companies, it is necessary to guarantee the applicability of the relevant accounting repositories in order to have a correct accounting in the books. In this case, the contract of taking or payment is useful for both buyers and sellers. Company A gets a lower price, while Company B receives the fine amount, as well as the ability to sell the products to another buyer at a total or lower cost.

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