Customs and duties pass-through

Amounts collected on behalf of third parties such as customs authorities are generally excluded from revenue because the provider acts as an agent for that specific pass-through, even while it may be principal for the freight service itself. Grossing up revenue with pure disbursements inflates both revenue and cost lines without changing profit, misleading users comparing revenue growth or margin percentages across periods or peers.

Is the customs duty or tax amount collected strictly on behalf of a government authority, with no markup, pricing discretion, or credit risk assumed by your company? Is the pass-through amount presented separately from the freight or handling fee on the contract and invoice, supporting agent treatment for that portion? If a separate handling fee is charged in addition to the exact reimbursed amount, is only that fee (not the duty itself) recognized as revenue?

1) For each customs/duty/tax amount collected, determine whether it is collected strictly on behalf of a government authority with no markup or pricing discretion by the provider. 2) Check whether the amount is presented separately from the freight/handling fee in the contract and invoice (a strong indicator of pass-through). 3) If it is a pure disbursement, exclude it from revenue and cost of sales entirely, record it through a balance sheet clearing/pass-through account. 4) If any markup or handling fee is embedded, separate that markup and recognize only the markup as revenue. 5) Reconcile the pass-through clearing account regularly to confirm amounts collected equal amounts remitted to the authority (no unexplained residual).

Measure the pass-through disbursement at the exact amount paid to/on behalf of the authority (no measurement judgment needed since it equals the government-set duty/tax). Measure the handling markup, if any, as the difference between the amount rebilled to the customer and the amount paid to the authority; that markup alone forms the transaction price for the service component and is recognized as revenue when the related service is performed.

Disclose: (1) the accounting policy for pass-through costs (customs duties, taxes, port charges) and how they are distinguished from the entity's own service fees; (2) where material, the amounts collected and remitted on behalf of customers versus freight/handling revenue; (3) the VAT/ZATCA treatment applied to disbursements, noted separately from the revenue conclusion; (4) any handling markup embedded in bundled invoices and how it is separated for revenue recognition.

• Grossing up revenue to include customs duties and taxes collected purely as a conduit, inflating both revenue and cost of sales without any profit impact but distorting margin ratios
• failing to distinguish genuine disbursements from service fees that include a handling markup, which would be revenue
• not reconciling the pass-through clearing account, allowing errors or short-remittances to accumulate unnoticed
• applying VAT treatment inconsistently between the disbursement and the markup portions.