Side letter
Definition
An informal or undisclosed written agreement between a buyer and seller that modifies the terms of the primary contract. Side letters are a primary vehicle for revenue fraud because they may grant informal return rights, extend payment terms, or condition the sale on future events, each of which would prevent revenue recognition under IFRS 15 or ASC 606.
Related terms
- Bill-and-hold
- An arrangement where title passes and revenue is recorded even though the seller retains physical possession of the goods at the buyer's...
- Bill-and-hold arrangement
- A transaction in which a seller invoices a customer for goods that remain physically on the seller's premises at the customer's request....
- Channel stuffing
- A scheme in which a company ships excess inventory to distributors or retailers near a reporting period's end to record revenue, knowing...
- Days sales outstanding (DSO)
- A ratio measuring how long, on average, a company takes to collect payment after a sale: (accounts receivable / revenue) x 365....
- Fictitious revenue
- Revenue recorded for a transaction that did not occur at all, or that involved a related party cycling funds to simulate customer...
- IFRS 15 / ASC 606
- The converged international (IFRS 15) and US (ASC 606) standards that replaced predecessor revenue rules from 2018. Both apply a five-step model:...
- Performance obligation
- Under IFRS 15 and ASC 606, the distinct promise to transfer a good or service to a customer. Revenue can only be...
- Premature revenue recognition
- Recording revenue in an earlier period than the standards permit, typically by treating an uncompleted performance obligation as satisfied. The transaction is...
- Round-tripping
- A circular transaction in which cash or assets flow between two or more related parties so that each records revenue without any...
Explained in
- Revenue Recognition Fraud: Detection and IndicatorsAn informal or undisclosed written agreement between a buyer and seller that modifies the terms of the primary contract. Side letters are a primary vehicle for...