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Thread: 09 Accounting Standard 9 - Revenue Recognition - AS 9

  1. #11
    Accounting Standards
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    Default APPENDIX of Accounting Standard 9 - Revenue Recognition - AS 9

    APPENDIX


    This appendix is illustrative only and does not form part of the accounting standard set forth in this Statement. The purpose of the appendix is to illustrate the application of the Standard to a number of commercial situations in an endeavour to assist in clarifying application of the Standard.


    A. Sale of Goods

    1. Delivery is delayed at buyer’s request and buyer takes title and accepts billing Revenue should be recognised notwithstanding that physical delivery has not been completed so long as there is every expectation that delivery will be made. However, the item must be on hand, identified and ready for delivery to the buyer at the time the sale is recognised rather than there being simply an intention to acquire or manufacture the goods in time for delivery.


    2. Delivered subject to conditions

    (a) installation and inspection i.e. goods are sold subject to installation, inspection etc.
    Revenue should normallynotbe recognised until the customer acceptsdelivery and installation and inspection are complete. In some cases, however, the installation process may be so simple in nature that it may be appropriate to recognise the sale notwithstanding that installation is not yet completed (e.g. installation of a factory-tested television receiver normally only requires unpacking and connecting of power and antennae).


    (b) on approval Revenue should not be recognised until the goods have been formally accepted
    by the buyer or the buyer has done an act adopting the transaction or the time period for rejection has elapsed or where no time has been fixed, a reasonable time has elapsed.


    (c) guaranteed sales i.e. delivery is made giving the buyer an unlimited right of return Recognition of revenue in such circumstances will depend on the substance of the agreement. In the case of retail sales offering a guarantee of “money back if not completely satisfied” it may be appropriate to recognise the sale but to make a suitable provision for returns based on previous experience. In
    other cases, the substance of the agreement may amount to a sale on consignment, in which case it should be treated as indicated below.


    (d) consignment sales i.e. a delivery is made whereby the recipient undertakes to sell the goods on behalf of the consignor Revenue should not be recognised until the goods are sold to a third party.


    (e) cash on delivery sales Revenue should not be recognised until cash is received by the seller or his
    agent.


    3. Sales where the purchaser makes a series of instalment payments to the seller, and the seller delivers the goods only when the final payment is received Revenue from such sales should not be recognised until goods are delivered.

    However, when experience indicates that most such sales have been consummated, revenue may be recognised when a significant deposit is received.


    4. Special order and shipments i.e. where payment (or partial payment) is received for goods not presently held in stock e.g. the stock is still to be manufactured or is to be delivered directly to the customer from a third party Revenue from such sales should not be recognised until goods are
    manufactured, identified and ready for delivery to the buyer by the third party.


    5. Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the same goods at a later date For such transactions that are in substance a financing agreement, the resulting
    cash inflowis not revenue as defined and should not be recognised as revenue.

    6. Sales to intermediate parties i.e. where goods are sold to distributors, dealers or others for resale
    Revenue from such sales can generally be recognised if significant risks of ownership have passed; however in some situations the buyermay in substance be an agent and in such cases the sale should be treated as a consignment sale.


    7. Subscriptions for publications Revenue received or billed should be deferred and recognised either on a straight line basis over time or, where the items delivered vary in value from period to period, revenue should be based on the sales value of the item delivered in relation to the total sales value of all items covered by the subscription.


    8. Instalment sales When the consideration is receivable in instalments, revenue attributable to
    the sales price exclusive of interest should be recognised at the date of sale. The interest element should be recognised as revenue, proportionately to the unpaid balance due to the seller.


    9. Trade discounts and volume rebates Trade discounts and volume rebates received are not encompassed within the definition of revenue, since they represent a reduction of cost. Trade discounts and volume rebates given should be deducted in determining revenue.

  2. #12
    Accounting Standards
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    Default Rendering of Services of Accounting Standard 9 - Revenue Recognition - AS 9

    B. Rendering of Services of Accounting Standard 9 - Revenue Recognition - AS 9


    1. Installation Fees In cases where installation fees are other than incidental to the sale of a
    product, they should be recognised as revenue only when the equipment is installed and accepted by the customer.


    2. Advertising and insurance agency commissions Revenue should be recognised when the service is completed. For advertising agencies, media commissions will normally be recognised when the related advertisement or commercial appears before the public and the necessary intimation is received by the agency, as opposed to production commission, which will be recognised when the project is
    completed. Insurance agency commissions should be recognised on the effective commencement or renewal dates of the related policies.

    A financial service may be rendered as a single act or may be provided over a period of time. Similarly, charges for such services may be made as a single amount or in stages over the period of the service or the life of the transaction to which it relates. Such charges may be settled in full when made or added to a loan or other account and settled in stages. The recognition of such revenue should therefore have regard to:


    (a) whether the service has been provided “once and for all” or is on a “continuing” basis;

    (b) the incidence of the costs relating to the service;

    (c) when the payment for the service will be received. In general, commissions charged for arranging or granting loan or other facilities should be recognisedwhen a bindingobligation has been entered into.Commitment, facility or loanmanagement fees which relate to continuing obligations or services should normally be recognised over the life of the loan or facility having regard to the amount of the obligation outstanding, the nature of the services provided and the timing of the costs relating thereto.


    4. Admission fees Revenue fromartistic performances, banquets and other special events should
    be recognised when the event takes place. When a subscription to a number of events is sold, the fee should be allocated to each event on a systematic and rational basis.

    5. Tuition fees Revenue should be recognised over the period of instruction.


    6. Entrance and membership fees Revenue recognition from these sources will depend on the nature of the services being provided. Entrance fee received is generally capitalised. If the membership fee permits only membership and all other services or products are paid for separately, or if there is a separate annual subscription, the fee should be recognised when received. If the membership fee entitles the member to services or publications to be provided during the year, it should be recognised on a systematic and rational basis having regard to the timing and nature of all services provided.

  3. #13
    Accounting Standards
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    Default Disclosure of Revenue from Sales Transactions of Accounting Standard 9 - Revenue Recognition - AS 9

    Accounting Standards Interpretation (ASI) 14
    (Revised)
    Disclosure of Revenue from Sales Transactions
    Accounting Standard (AS) 9, Revenue Recognition


    [This revised Accounting Standards Interpretation replaces ASI 14 issued in March 2004.]

    ISSUE

    1. What should be the manner of disclosure of excise duty in the presentation of revenue fromsales transactions (turnover) in the statement of profit and loss.

    CONSENSUS

    2. The amount of turnover should be disclosed in the followingmanner on the face of the statement of profit and loss:

    Turnover (Gross) XX
    Less: Excise Duty XX
    Turnover (Net) XX


    3. The amount of excise duty to be shown as deduction from turnover as per paragraph 2 above should be the total excise duty for the year except the excise duty related to the difference between the closing stock and opening stock. The excise duty related to the difference between the closing stock and opening stock should be recognised separately in the statement of profit
    and loss, with an explanatory note in the notes to accounts to explain the nature of the two amounts of excise duty.

  4. #14
    Accounting Standards
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    Default BASIS FOR CONCLUSIONS of Accounting Standard 9 - Revenue Recognition - AS 9

    BASIS FOR CONCLUSIONS of Accounting Standard 9 - Revenue Recognition - AS 9


    4. Financial analysts and other users of financial statements, sometimes, require the information related to turnover gross of excise duty as well as net of excise duty for meaningful understanding of financial statements. However, it was noted that some enterprises disclose turnover net of excise
    dutywhile others disclose turnover at gross amount. Accordingly, this Interpretation requires disclosure of turnover gross of excise duty as well as net of excise duty on the face of the statement of profit and loss.



    5. The excise duty related to the difference between the closing stock and opening stock is not shown as deduction from turnover since it is not included in the turnover (gross). As per the interpretation, the excise duty related to the difference between the closing stock and opening stock is recognised separately in the statement of profit and loss.


    6. As per the interpretation, two amounts of excise duty would be appearing in the statement of profit and loss: one as deduction from turnover and the other as a separate item in the statement of profit and loss. With a view to explain the nature of these two amounts of excise duty appearing in the statement of profit and loss, this Interpretation requires an explanatory note to be included in this regard in the notes to accounts.

  5. #15
    Accounting Standards
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    Default Accounting for revenue and costs related to ‘Internet- ticketing’ of Accounting Standard 9 - Revenue Recognition - AS 9

    A. Facts of the Case Accounting Standard 9 - Revenue Recognition - AS 9


    1. A company has been set up as a public limited company by the Ministry of Railways with a view to strengthen its marketing and service capabilities in the areas of rail catering, tourism, and passenger amenities.In order to improve passenger amenities/services, the company is providing internet-based advance train reservation booking facilities.

    2. The company has set up its infrastructure for booking of rail tickets through internet. Investment for setting up of such infrastructure has been made by the company from its own resources. It has set up an office at New Delhi Railway Station premises. Necessary infrastructure includes computers, servers, printers, manpower, etc., deployed by the company.In order to carry on the business of ticket bookings by the company, Railways has allowed access to its ‘Passenger Reservation System’ (PRS) for advance reservation.

    3. The querist has stated that any customer requiring booking of a railway ticket is required to register himself/herself with the company at its website and thereafter the customer can send his request for booking of the ticket through internet. The company collects cost of the tickets and its service charges from the customer through credit card or direct debit to the customer’s bank account through its payment gateways. Tickets issued to the customers are either hand-delivered from its office or sent by courier at the address given by the customer.

    4. Payment to Indian Railways for the tickets booked by the company is being made by way of adjustment against the amount being maintained as ‘Advance Deposit’ with the Railways. Deposit is being recouped by the company from time to time. Statement for the cost of the tickets booked by the company is generated every day and the amount against those tickets is charged by the Railways from the deposit maintained with it.

    5. As per the querist, Indian Railways is not paying any commission to the company. The company is levying service charges on its customers and the same is recovered in addition to the cost of the tickets. The quantum of the service charge is exclusively decided by the company. Indian Railways does not interfere in any manner to decide the service charges made by the company from the customers.

    6. In case of default, repudiation of transaction or non-recovery of cost of ticket, etc., the company is responsible for the same and not the Railways. Thus, according to the querist, the company assumes significant risks and rewards of transactions, such as, risk of loss in collection, loss on account of delay in delivery or return, etc. Indian Railways does not assume any responsibility or risk. In case of cancellation of tickets also, refund is allowed only by the company. Though the concerned customer can also cancel the tickets at the PRS counter of the Indian Railways, no refund is, however, allowed by the Railways. Only a cancellation advice is given by the Railways to the customer. Refund on the cancelled ticket is received by the customer from the company by way of direct credit into his credit card account / bank account. In short, while the company is responsible to Indian Railways for payment of the cost of tickets, it has to recover the cost of the tickets from the customers and also to pay refunds to the customers.

    7. The company is maintaining complete record and details of the transactions effected through internet.

    8. With regard to the whole procedure regarding internet booking by the company, the Ministry of Railways (Railway Board) has issued a Circular No. 41, dated 24.5.2002, which has been separately provided by the querist for the perusal of the Committee. In the Annexure to the said Circular, the Ministry of Railways has prescribed in detail the procedure to be followed, the following paragraphs of which have been specifically referred by the querist:

    — Paragraph 2: The company shall be allowed access to the Indian Railway PRS System for advance reservation on behalf of its customers and the Indian Railways shall provide all necessary assistance to the company as is being extended to a new PRS center/user.

    — Paragraph 3: The company shall provide service at such terms and conditions as prescribed and can impose such restrictions as are considered necessary.

    — Paragraph 4: The company shall bear the cost of computer peripherals.

    — Paragraph 20: Payment for tickets booked by the company shall be made against a lumpsum deposit in advance.

    — Paragraph 21: The company shall devise its own system for recovery of ticket fare, service charges, etc. System for delivery of tickets will also be devised by the company.

    — Paragraph 27: Ticket rolls of a distinct colour shall be handed over by the Railways to an authorised official of the company and thereafter it would be the responsibility of the company to maintain them and use for printing the tickets.

    — Paragraph 30: At the end of each day, a statement of transactions for bookings through the company shall be generated and this statement would show distinctly the fare recoverable from the company, excluding commission / service charges of the company.

    9. The company, while preparing its accounts for the year ended 31st March, 2003, considering the relevant factors and its responsibility regarding carrying out its business of booking of tickets through internet, accounted for gross receipts from booking as sale consideration. Payment made to the Railways on account of cost of tickets booked was shown as expenditure in the profit and loss account. In the notes to accounts, the company has duly disclosed its accounting policy regarding income as well as expenditure on internet booking and has stated as under:

    (i) Income from Internet-ticketing: Income from Internet- ticketing is recognised on the basis of value of the tickets sold through corporation’s web-enabled payment gateway including service charges.

    (ii) Expenditure on Internet-ticketing: The cost of tickets booked through the Passenger Reservation System of Indian Railways is recognised as expenditure on accrual basis.

    10. According to the querist, the company has followed the accounting policy of crediting gross receipts from Internet-ticketing and debiting the expenditure incurred on the same to the profit and loss account, taking into consideration the following factors:

    (i) Part II of Schedule VI to the Companies Act, 1956, does not contain any specific provision regarding preparation of accounts in the given circumstances in a particular manner.

    (ii) There is no direction in any Accounting Standard or any Guidance Note issued by the Institute of Chartered Accountants of India (ICAI), on accounting treatment, in the facts and circumstances of the case of the company. It is not a case of mere agency relationship as envisaged in paragraph 4.1 of AS 9 and, therefore, it is not appropriate to consider only the service charges as its income.

    (iii) ICAI had given an opinion in the facts and circumstances of a travel agent vide query no. 2.8 contained in the Compendium of Opinions Vol. XI (page 199). The query related to application of section 44AB of the Income-tax Act, 1961, to a travel agent with reference to gross receipts or commission amount only. Facts of the query were identical to the facts in the present case. In this case of travel agent also, total consideration on account of tickets booked was credited to the profit and loss account and expenditure incurred on purchase of tickets was debited as expenditure. On the basis of above facts, an opinion was expressed that section 44AB of the Act was applicable, if total sale consideration of tickets and service charges exceeded Rs. 40 lakh. Though the opinion of the Expert Advisory Committee in the said case is not relevant in the present case, it establishes that, in the facts and circumstances of a travel agent, method of crediting gross receipts and debiting the expenditure on ticketing is appropriate. According to the querist, the facts of the present case, in fact, are more in favour of accounting the gross receipts, considering its responsibility in relation to booking activities.

    (iv) CBDT Circular No. 452 dated 17.3.1986 has explained provisions of section 44AB of the Income-tax Act. CBDT in the above Circular has drawn a distinction between ‘Kachha Arhatias’ and ‘Pacca Arhatias’. It has been clarified that ‘Kachha Arhatias’ have no responsiblity other than bringing the parties together and for receiving service charges for the same. According to the querist, in the facts of the case, the company is not simply acting as an agent for bringing the two parties together. Hence, it does not fall strictly within the term ‘Kachha Arhatia’. Accordingly, total sale consideration is to be considered for the purpose of section 44AB of the Act.

    (v) Since the responsibility for recovery of the cost of tickets is on the company, many a times it happens that it is not able to recover the cost for various reasons. In such cases, the company suffers loss and has to write off the amount not recoverable as bad debts. During the year ended March, 2003 also, it had to write-off an amount of Rs. 4,28,054 as bad debts on account of non-recovery of the cost of tickets. As per the provisions of section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961, deduction is available in respect of bad debts only if the amount has been considered as income in the same year or in an earlier year. Accordingly, in case gross receipts are not credited to the profit and loss account, deduction would not be available as bad debts. In that case, the company has to argue its case for allowability of loss, which may be a somewhat difficult proposition.

    11. The Comptroller & Auditor General of India has made its comments under section 619(4) of the Companies Act, 1956, in respect of the method of accounting followed by the company in recognising revenue and expenditure for the year ended 31st March, 2003, vide its report dated 8.9.2003. It is of the opinion that the company has an agency relationship vis-à-vis the Railways for Internet-ticketing and the accounting for cost of tickets and revenue on gross basis has resulted in over-statement of the revenue and expenditure.

    12. The directors of the company in their report to the shareholders commented on the observations of the Comptroller & Auditor General of India, referred to hereinabove, by stating therein that, considering the facts and circumstances of the case of the company and its responsibility in respect of the transactions, it has followed the accounting policy of crediting and debiting the revenue and expenditure, respectively, on gross basis. The directors also decided to make a reference to the Expert Advisory Committee of ICAI, for opinion on the accounting policy followed by the company.


    B . Query

    13. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

    (a) Whether the accounting policy adopted by the querist of crediting gross receipts on account of Internet-ticketing, including its service charges, and debiting cost incurred for the ticketing to the profit and loss account is in violation to any statutory requirement, Accounting Standard or Guidance Note issued by ICAI.

    (b) In the facts and circumstances of the case, would it not be more appropriate to recognise revenue from issuing tickets and expenditure incurred thereon on gross basis and not after netting them off?


    D. Opinion

    On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 13 above:

    (a) The accounting policy adopted by the querist of crediting gross receipts on account of Internet-ticketing, including its service charges, is in violation of AS 9. Accordingly, debiting cost incurred for the ticketing to the profit and loss account is also not correct.

    (b) In the facts and circumstances of the case, it would not be appropriate to recognise revenue from issuing tickets and expenditure incurred thereon on gross basis. Revenue should be measured by service charges made to the customers for booking of tickets.

    Opinion finalised by the Committee on 5.8.2004

  6. #16
    Accounting Standards
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    Default Accounting treatment of surcharge in the nature of interest on overdue outstandings

    A. Facts of the Case

    1. A central public sector company is engaged in construction and operation of hydroelectric power projects. The power generated by the company is supplied to various state electricity boards (beneficiaries), the rates for which are notified by the Government of India separately for each generating station.

    2. According to the querist, on the recommendations of the Public Accounts Committee, the Government of India had decided to charge surcharge in the nature of interest @ 2% p.m. in case of payments for sale of power getting delayed beyond one month of issue of the respective bill. This decision formed part of the notification issued by the Government of India notifying rates for sale of power for generating stations.

    3. The sales during 1996-97, 1997-98 and 1998-99 were Rs. 534 crore, Rs. 1,118 crore (estimated) and Rs. 1,277 crore (estimated) respectively. The profit for the respective years was Rs. 86 crore, Rs. 234 crore (provisional) and Rs. 198 crore (provisional).

    4. The company had been raising bills on account of surcharge but payments were not being received uptil financial year 1996-97. Such bills were not being accounted for in the books of account. The company was, however, disclosing the following accounting policy consistently:

    “Revenues and expenses are generally accounted for on accrual basis except in the case of surcharge recoverable from debtors, sale of scrap, income from consultancy charges and the expenditure on account of LTC encashment.”

    5. The querist has stated that realisations from the debtors, viz., the state governments/state electricity boards on account of sale of power are not good. No debtor paid interest, which has accumulated for the last 10/12 years. The average debt collection period at present is around one and a half years. The company was financing its operational expenses till 1996-97 from the receipts from debtors. In 1997-98 it had to raise temporary loans to meet the shortfall in this regard. The interest payable on these loans will not be reimbursed out of tariff.

    6. As per the querist, the government decides from time to time to recover the outstandings from state governments through appropriation of Central Plan Assistance in various instalments during the next four years. Earlier, only principal was stipulated to be recovered, but in 1997-98 the government decided to also recover the interest accrued and billed upto 30.12.96/31.3.97. This recovery is to be made in suitable instalments as may be decided by the government and is likely to be spread over a period of about 4 years.

    7. As per the querist, in view of the uncertainty involved, the company had not accounted for surcharge. However, since the company has now received substantial amount of surcharge and is likely to get the balance amount of surcharge, review of the policy and its depiction in the balance sheet need consideration. The issues involved, as per the querist, are:

    (i) What will be the amount to be shown as income on account of surcharge, i.e.,

    (a) the actual surcharge recovered during the year, i.e., Rs. 63 crore; or

    (b) the amount of surcharge included for recovery in central appropriation, i.e., Rs. 301.19 crore; or

    (c) the total amount accrued as surcharge at the year-end which is around Rs. 1100 crore.

    (ii) The manner of disclosure of the amount so determined.

    (iii) Depending on (i) and (ii) above, the tax implications.

    8. The querist has stated that the company has examined these issues in the light of Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, Accounting Standard (AS) 9, ‘Revenue Recognition’, Guidance Note on ‘Disclosure of Items of Income and Expenditure of Previous Year’, section 209(3)(b) of the Companies Act, 1956, Part II of Schedule VI to the Companies Act, 1956, opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India published in Vol. XV (Query No. 1.2), and instructions issued by the Company Law Board from time to time.

    9. As per the querist, if the company is to account for the amounts as listed in paragraph 7(i)(b) or (c) above as revenue for the year, then other income as well as profit for the year will shoot up manifold and will drop substantially in the next year. The figure of the net profit will not be comparable and profit on account of surcharge may be more than the profit from operations. Similarly, the company in future may have to account for surcharge on accrual basis in terms of section 209(3)(b) along with Accounting Standard (AS) 9.

    10. Paragraph 4.1 of AS 9 defines revenue as the gross inflow of cash, receivables, or other consideration arising in the course of the ordinary activities and is measured by the charges made to the customers or clients for the goods supplied, the services rendered to them and by the charges and rewards arising from the use of resources by them.

    11. Further, paragraph 9.4 of AS 9 states as below:

    “An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.”

    12. According to the querist, in the case of the company, part recovery of surcharge has been made, the amount yet to be recovered can be reasonably determined as it is chargeable at a fixed rate of 2% per month on outstandings, part of the bills have been raised, and levy of surcharge is part of agreement/notification. However, the recovery of the full amount indicated earlier is quite difficult and uncertain particularly when full recovery of even the principal amount through normal channel is extremely difficult. Moreover, if the company notionally accounts for surcharge recoverable in the books of account, the company may have to pay income tax on the amount which is unlikely to be received in near future.

    B. Queries

    13. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

    (a) (i) Whether the company will be complying with the requirements of section 209(3)(b) of the Companies Act, 1956 read with Accounting Standard (AS) 9, ‘Revenue Recognition’ if it recognises actual receipt on account of surcharge during the year as revenue, while continuing to disclose the accounting policy as given in paragraph 4 above with the additional words “which are accounted for on actual receipt basis”.

    (ii) Whether the amount to be recognised would be shown as a ‘prior period item’ or would it be recognised as an ordinary activity for the year.

    (b) If answer to (a)(i) is in the negative, which of the amounts, i.e., amount as per paragraph 7(i)(b) or as per paragraph 7(i)(c), is to be considered as revenue for the year.


    D. Opinion

    22. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 13:

    (a)(i)According to the facts of the query, there does not seem to be any significant uncertainty regarding the recovery of the amount of surcharge included for recovery in central appropriation, i.e., the amount as given in paragraph 7(i)(b) above. Accordingly, recognition of surcharge on actual receipt basis will not be in accordance with the requirements of the Accounting Standard (AS) 9 on ‘Revenue Recognition’ and section 209(3)(b) of the Companies Act, 1956, even with the extended note as suggested by the querist.

    (ii) The amount of surcharge recognised should not be shown as a prior period item. It should be recognised as an item of income from ordinary activities of the company. However, disclosure in accordance with paragraph 12 of AS 5 reproduced above, would be required to be made.

    (b) In view of (a)(i) above, the amount given in paragraph 7(i)(b) above, should be recognised in the year 1997-98 when the government included it in central appropriation. As regards the remaining amount of surcharge accrued as at the end of the year, an assessment needs to be made as to whether there is any significant uncertainty as to its collectability. If there is no such significant uncertainty, it should be recognised. In case of significant uncertainty, the revenue recognition should be postponed and disclosures should be made in accordance with paragraph 14 of AS 9 reproduced above.

    Opinion finalised by the Committee on 23.6.1998.

  7. #17
    Accounting Standards
    Guest

    Default Revenue recognition in respect of advance against depreciation received by a power generating company

    A. Facts of the Case

    1. A power generating company, within the meaning of section 2(4A) of the Electricity (Supply) Act, 1948, incorporated under the Companies Act, 1956, has developed 300 MW Baspa II Hydro Electric Project on Build, Own, Operate and Transfer basis under an implementation agreement with the Government of Himachal Pradesh (GOHP). The said project has been commissioned in June 2003 and is supplying the entire power being generated from the project to the Himachal Pradesh State Electricity Board under and in accordance with a power purchase agreement (PPA) executed between the company and the Board on 4th June, 1997, read with a supplementary agreement to the said PPA dated 28th February 2003.

    2. According to the querist, under the terms of the said PPA, the company has to supply 12% of the power generated, free of cost to the Board and the balance 88% at tariff computed on the basis specified in the PPA. A copy of the relevant provisions of the PPA relating to the tariff has been separately provided by the querist.

    3. The querist has stated that the tariff, inter alia, includes depreciation/ advance against depreciation for the tariff year to cover the amount of principal debt required to be paid in the relevant tariff year with 4.3% of the capital cost being treated as depreciation and balance amount being treated as advance against depreciation. Such advance against depreciation shall be adjusted against depreciation payable by the Board after the expiry of debt redemption period. The net effect of this provision is that depreciation/advance against depreciation is higher during the initial period to meet the loan repayment schedule and lower in later period. The written down value method of depreciation allowed under the Companies Act, 1956 and the Income-tax Act, 1961 also gives higher depreciation in initial years and lower depreciation in later years.

    4. The company is raising the invoices for the power to the Board based on the tariff as determined under the provisions of the PPA.

    5. Further, according to the querist, the depreciation for the purpose of the profit and loss account is to be considered as per the provisions of the Companies Act, 1956, which provide that the amount of depreciation to be charged in the books shall be at the rates specified in Schedule XIV to the Companies Act, 1956 and is apparently not related to the depreciation/ advance against depreciation considered for the purposes of computation of tariff under the terms of the PPA.

    6. As per the querist, there are two views expressed in the matter. One view is that the advance against depreciation should be excluded from the revenue and transferred to ‘Income received in advance account’ in the balance sheet. The querist has stated that the Expert Advisory Committee of the Institute of Chartered Accountants of India, in its opinion given to another company (contained in Compendium of Opinions Volume XVII, No. 1.31) has opined that it is in order to exclude the revenue related to advance against depreciation from the revenue and to transfer it to ‘Income received in advance account’. The other view is that the consideration of advance against depreciation is only a part of the mechanism/principle to determine the tariff for various years and the entire income based on the tariff so determined could be considered as revenue. According to the querist, this view is apparently further supported by the following:

    (a) PPA does not provide that any part of the tariff is payable as advance to be adjusted in future.

    (b) PPA does not provide for any recovery from the company on account of inclusion of any advance against depreciation in the tariff, in case the PPA is prematurely terminated at any stage.

    (c) The company has an unconditional right to receive the full amount based on the tariff computed on the principles given in PPA from year to year.

    (d) The company is free to utilise the revenue so received for any purpose and there is no restriction like building any reserve to meet future liability.

    (e) There is no concept of fixed or levelised tariff either during PPA period or thereafter. In fact, the rates necessarily remain variable throughout the PPA period from year to year as shown in the table above.

    The querist has stated that the company has also been advised that since the Board has agreed to certain principles to compute the tariff for various years, the tariff so computed will determine the revenue and taking any part of such income to the ‘Income received in advance account’ will neither be in accordance with the provisions of the PPA nor will reflect the true and fair picture of the income.

    B. Query

    7. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

    (a) Whether the depreciation/advance against depreciation considered in the computation of tariff and not the depreciation as per the provisions of the Companies Act, 1956 should be charged against the revenue for the purposes of determining profitability of the company.

    (b) Whether it would be appropriate to consider the entire accrued income based on the tariff determined under the terms of the PPA (such tariff being inclusive of advance against depreciation during initial years) as revenue in the profit and loss account.

    C. Points considered by the Committee

    8. The Committee notes that paragraph 8.6.5.1 of the Power Purchase Agreement (PPA), separately provided by the querist with his query, requires as follows:

    “During the period when the debt is outstanding as per the approved financial package, the payment on this account will be equal to the amount of principal required to be paid in the relevant tariff period/ tariff year subject to the condition that the amount payable for a full tariff year shall not be more than an amount equal to 1/12th (one twelfth) of the loan component of the capital cost as per the approved financial package. Out of the amount as paid on account of depreciation/advance against depreciation for debt redemption period, an amount worked out @ 4.3% of the capital cost for each such full period of 12 months, shall be treated as the payment made on account of depreciation and the balance amount shall be treated as advance against depreciation. After the expiry of the debt redemption period, the total amount already paid/payable by the Board to the company on account of advance against depreciation shall be adjusted against the depreciation payable by the Board for the future period at a per annum rate of 4.3% of the capital cost. No further payments on account of depreciation shall be made by the Board to the company after the debt redemption period until the entire amount of advance against depreciation is fully adjusted against the amount that would have otherwise been payable by the Board on this account, i.e., at a per annum rate of 4.3% of the capital cost. After the full adjustment of the advance against depreciation, further payments on account of depreciation shall be made at an annual rate of 4.3% of capital cost as per the approved financial package, subject to the condition that the total payment on account of depreciation shall not exceed 90% of the capital cost as per the approved financial package. For the purpose of computing the capital cost, the capital cost will be reduced by the value of leased assets as on the scheduled date for commercial operation of the unit(s)/project as per the approved financial package. The amount of depreciation/advance against depreciation, for a part of the year shall be worked out, if necessary, on pro-rata basis.”

    9. The Committee is of the view that the advance against depreciation is allowed with the objective of enabling the electricity company to recover depreciation higher than that as would be allowed as per the rates of depreciation notified by the Central Government from time to time for the purpose of fixation of electricity tariff so that the company may be able to generate internal resources for the payment of loans. The Committee further notes from the facts of the query that this advance against depreciation will be adjusted in later years.

    10. The Committee notes that as per the accrual basis of accounting “revenue is recognised as it is earned” (paragraph 2.5(i) of the Guidance Note on Accrual Basis of Accounting, issued by the Institute of Chartered Accountants of India). The Committee further notes that where revenue, or part thereof, received/receivable, during a particular period, is to be adjusted in future, to that extent the revenue received/receivable is not considered as earned, but is treated as revenue received in advance. The Committee is, accordingly, of the view that in the present case, that part of the tariff, which arises because of inclusion of advance against depreciation, should be treated as revenue received in advance since the said advance will be adjusted in later years against the depreciation.

    11. With regard to the arguments given in favour of the view that the revenue to the extent of advance against depreciation should not be treated as income received in advance but should be recognised in the year in which the same is received/receivable, the views of the Committee are as below:

    (a) PPA provides that the advance against depreciation is to be adjusted against depreciation in future. Since the tariff is based on depreciation, it amounts to excess tariff being received in the initial years which gets adjusted in the later years through the depreciation route.

    (b) Even though the PPA does not directly provide for any recovery from the company on account of inclusion of any advance against depreciation in the tariff in case the PPA is prematurely terminated at any stage, paragraph 5 of Schedule II to the PPA provides for the recovery of the advance against depreciation indirectly. The Committee is of the view that the issue should be examined on going concern basis.

    (c) The arguments that the company has unconditional right to receive the full amount based on the tariff and the fact that the company is free to utilise the revenue for any purpose are not relevant in deciding when the revenue should be recognised. In many other cases also, advances received are utilised by the recipients on receipt, but that in itself does not mean that the revenue has also been earned and, therefore, should be recognised. For example, an advance may have been received for sale of goods in future. This advance may be utilised by the enterprise. This does not mean that revenue on sale of goods should also be recognised at the stage when advance is utilised even though the sale is not complete.

    (d) The recognition of revenue is determined on the basis of the generally accepted accounting principles whether or not there is any concept of fixed or levelised tariff. Accordingly, the view of the Committee contained in paragraph 10 above is in accordance with the generally accepted concept of matching since the revenue is appropriately matched with the cost, (i.e., the depreciation).

    12. The Committee is of the view that since the company has been incorporated under the Companies Act, 1956, the company should charge depreciation as per the provisions of the Act.

    D. Opinion

    13. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 7 above:

    (a) The depreciation as per the provisions of the Companies Act, 1956, should be charged against the revenue for the purposes of determining profits/losses of the company.

    (b) The advance against depreciation included in tariff should be treated as income received in advance keeping in view the generally accepted accounting principles so that the profit and loss account and the balance sheet of the company reflect a true and fair view of the profit earned and the state of affairs, respectively.

    Opinion finalised by the Committee on 28.4.2005

  8. #18
    Accounting Standards
    Guest

    Default Recognition of revenue for providing containerised cargo services


    A. Facts of the Case


    1. A government company, within the meaning of section 617 of the Companies Act, 1956, works under the direct administrative control of the Ministry of Railways (MoR), Government of India. In respect of the affairs of the company, the principal decisions are taken by the MoR. These decisions are implemented by the board of directors of the company after necessary deliberations and passing necessary resolutions in respect of such decisions.

    2. The company is engaged in the business of providing complete logistics services for containerised cargo (emphasis supplied by the querist). The company has been licensed at several locations by the Customs Department of Government of India to provide customs bonding services to customers in the export and import (EXIM) business. The operating activities of the company are mainly carried out at its Inland Container Depots (ICDs), Container Freight Stations (CFSs) and Port Side Container Terminals (PSCTs) spread all over the country including remote areas.

    3. The main services provided by the company to its customers, as per the querist, are as follows:

    (i) Establish inland ports to enable customers to avoid trips to sea side ports in order to acquire customs clearance;

    (ii) Custodian of goods sealed in containers;

    (iii) Enable customs bonding;

    (iv) Providing single window facility to the customers for import and export trade;

    (v) Undertake guarantee on behalf of customers to the customs authorities regarding goods sealed in containers;

    (vi) Safety of goods as long as they are in the custody of the company;

    (vii) Transport the goods to the destination by rail and road;

    (viii) Door-to-door service; and

    (ix) Handling and storage facilities.

    4. The company has adopted the following accounting policies for recognition of revenues/expenses:

    Policy no.11 in Schedule 10:

    "Freight & handling income/expenses are accounted for at the time of booking of containers".

    5. The querist has emphasised that although the charges are collected from the customers under the head ‘freight & handling income’ as shown in the Inward Way Bill (IW Bill), the freight and handling income includes amount collected from the customers towards the guarantees provided by the company on the entire value of the goods stuffed in the container against any mishap. The liability against the company in case of non-performance will amount to reimbursement of the entire value of the goods in the container as well as revenue towards freight and handling collected. Thus, the liability of the company will be much more than the revenue collected (emphasis supplied by the querist).

    6. The statutory auditor of the company has qualified the audit report for the financial year ended on 31st March, 2004, as follows:

    "Accounting for freight & handling income/expenses has been done on cash basis which is not in compliance with section 209 of the Companies Act, 1956, and Accounting Standard (AS 9), ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India".

    7 . Modus operandi and consistent practice of the company as described by the querist is as below:

    A. Income towards the bundle of services provided by the company:

    (a) The company books its revenue on the basis of IW Bill and when an IW Bill is issued to the customer, the company in fact provides a bundle of services to the customers listed as under:

    (i)Custodian of goods sealed in containers.

    (ii)Enable customs bonding.

    (iii) Undertake guarantee on behalf of customers to the customs authorities regarding goods sealed in containers.

    (iv) Safety of goods as long as they are in custody of the company.

    (v) Transport the goods to the destination by rail and road.

    (vi) Door-to-door service.

    (vii) Handling and storage facilities.

    (b) The first three services listed above are completed immediately on issuance of IW Bill and the customer goes back with the satisfaction that he has received a document, which is recognised in the market as a negotiable instrument.

    (c) The customer looks for assurance that the entire responsibility of the goods in the container is transferred to the company and he gets this assurance in the form of an IW Bill. The IW Bill is the counterpart of the railway receipt issued by the Indian Railways and one copy of the IW Bill is submitted to the Indian Railways on the basis of which the Indian Railways books its revenue.

    B. Railway freight, handling charges etc., being fully provided against the income:

    The railway freight becomes payable to the Indian Railways by the company on the basis of this IW Bill as laid down in the agreement with the Railways. Therefore, the company provides for the railway freight as soon as IW Bill is issued. All other provisions for handling charges are made in accounts fully to the same extent in the light of the income credited.

    8. In the view of the querist, the recognition of revenue is in accordance with AS 9 as below:

    (i) In terms of paragraph 7 of AS 9, in case of service industry, revenue from service transactions is usually recognised as the service is performed, either using proportionate completion method or using completed service contract method.

    (ii) Paragraph 4.2 of AS 9 further states that completed service contract method is a method of accounting which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed.

    (iii) The completed service contract method as stated in AS 9 emphasises the expression substantially completed (emphasis supplied by the querist). In line with this provision of AS 9, the company has been recognising freight/handling income at the point of time when all documentary procedures for booking of the cargo/containers for its onward transportation have been completed and the payment from the customers has also been received which leaves no significant uncertainty regarding the amount of consideration that will be derived from rendering of service.

    (iv) In addition, the querist reiterates that in terms of AS 9, the revenue from rendering of services should be recognised when the performance as specified in paragraph 12 of AS 9 is completed and it is reasonable to expect ultimate collection of the revenue. The company meets both the conditions at the time of issue of its IW Bills, accordingly, the recognition of revenue at the time of issue of IW Bill is in line with the requirements of AS 9.

    9. The querist states that the business environment of the company is unique particularly due to its close relationship with the Indian Railways. The revenue from IW Bill is recognised not only for services rendered in respect of the goods to the destination by rail and road, but for custodianship of goods as well as for undertaking the guarantee on behalf of the customers to the custom authorities for safety of the goods and for handling and storage facilities etc., which together can be called ‘ bundle of services’. The expenditure for freight/handling charges etc., are also fully provided for by the company. It is further stated by the querist that, at the time of issuance of IW Bill, as the substantial portion of ‘bundle of services’ is complete, there is no significant uncertainty regarding the completion of service. In view of this, according to the querist, recognition of revenue by the company at the time of issue of IW Bill fully complies with the condition laid down in AS 9.

    10. The querist has drawn the attention of the Expert Advisory Committee to the fact that it had earlier obtained the opinion of the Committee on the issue of recognition of revenue in the situation of rendering of services relating to freight and handling charges. The querist has also referred to the rejoinders sent by him for the consideration of the Committee and the views of the Committee thereon. A copy each of the aforesaid papers has been supplied by the querist for the reference of the Committee. The querist has now sent the case afresh stating that it is not only the service of transporting the container which is rendered by the company in question but certain other services also such as custodianship of goods, guarantee on behalf of customers to the customs authorities regarding goods sealed in container etc., although the amount charged by the company is a composite amount.

    B . Query

    11. The querist has sought the opinion of the Expert Advisory Committee as to whether the practice of the company to recognise revenue from providing ‘bundle of services’ on issuance of IW Bill is in compliance with the requirements of AS 9.

    C. Points considered by the Committee

    12. The Committee notes from the Facts of the Case that the railway freight becomes payable to the Indian Railways by the company on the basis of IW Bill as laid down in the agreement with the Railways. Therefore, the company provides for the railway freight as soon as IW Bill is issued. The Committee notes from the copy of the Inland Way Bill issued by the company to its customers (sent by the querist along with his earlier query) that the services referred to by the querist in paragraph 3 of the ‘Facts of the Case’ are not stated therein. Apparently, therefore, either there may be a separate agreement with the customers with regard to the services specified in paragraph 3 or there are different types of contracts with different customers. The Committee further notes that in the terms and conditions mentioned in the copy of the Inland Way Bill, one of the conditions is that "This Inland Way Bill is issued subject to the conditions and liabilities as specified in the Railways Act, 1989". It is obvious that this condition will be applicable where carrier of the containers is Indian Railways. However, where the company is sending goods by road, the conditions and liabilities, in this regard, have not been specified. Thus, terms and conditions specifying the liabilities of the company in case of non-performance of service(s) are not available to the Committee. Further, where the company in question is rendering a number of services as mentioned in paragraph 3 of the Facts of the Case to its customers, apart from transporting the goods to the destination by rail or road, apparently the company is charging a composite price for rendering all these services. The Committee is of the view that, for the purpose of applying proportionate completion method and completed service contract method, the company may have to ascertain whether it is feasible to segregate the consideration attributable to each of the services rendered by the company. If it is feasible to do so, for each of the services, it should be determined whether proportionate completion method or the completed service contract method should be applied. In case it is not feasible to segregate the consideration between the different services rendered by the company in question, the Committee is of the view that the company will have to determine whether the liabilities for risks related to non-performance of various services, borne by the company after the time of handing over the containers to the carrier are significant or not. In case it is determined, on the basis of various factors (for example, the risk of liability with regard to damages borne by the company in case of damage to goods during transit) that the liabilities for risks related to non- performance insofar as the company is concerned are not significant at the time of handing over the containers to the carrier, the company may consider the performance as substantially complete and, accordingly, recognise revenue at the time of handing over the containers to the carriers

    D. Opinion

    On the basis of the above, the Committee is of the opinion that revenue from providing ‘bundle of services’ should be recognised on the basis of the considerations specified in paragraph 12 above.

    Opinion finalised by the Committee on 27.12.2004

  9. #19
    Accounting Standards
    Guest

    Default Recognition of revenue arising from ground rent of Accounting Standard 9 - Revenue Recognition - AS 9

    Recognition of revenue arising from ground rent of Accounting Standard 9 - Revenue Recognition - AS 9
    A. Facts of the Case


    1. A government company, within the meaning of section 617 of the Companies Act, 1956, is working under the administrative control of theMinistry of Railways (MoR), Government of India. In respect of the affairs of the company, the principal decisions are taken by the MoR. These decisions are implemented by the board of directors of the company after necessary deliberations and passing necessary resolutions in respect of such decisions.

    2. The company is engaged in the business of handling and transportation of containerised cargo. The containers are transported by road, rail and air. The company provides these services to shipping lines, clearing and forwarding agents and other customers. The company operates container terminals across the country to cater to the needs of the trade which includes export-import business as well as domestic business. Accordingly, the activities of the company have been divided into International Traffic (export and import business) and Domestic Traffic (domestic business). The operating activities of the company are mainly carried out at its Inland Container Depots (ICDs), Container Freight Stations (CFSs) and Port Side Container Terminals (PSCTs) spread all over the country.

    3. The main sources of income of the company are from freight, handling charges, transportation charges, ground rent and wharfage, etc. The querist has provided the following brief description of these incomes:


    (a) Freight and transportation incomes are the rail and road haulage charges respectively, charged from the customers.

    (b) The income from handling is the amount received for handling of the containers.

    (c) Ground rent is the parking charges for the time period during which a container remains parked in an ICD of the company after the expiry of permissible free time limit. The income also includes charges for safety and security of containers/cargo.

    (d) Wharfage is the amount collected for cargo which remains in the warehouse beyond its permissible free time limit.
    Major expenditure of the company is towards freight payment to Railways and payments made to contractors for handling and transportation of containers.

    4. The company has adopted the following accounting policies for recognition of revenue/expenses during the financial year 2000-01:

    Policy no. 1 in Schedule 10: Accounting conventions & concepts

    “The financial statements are prepared under the historical cost convention generally on accrual basis and in accordance with applicable mandatory accounting standards and relevant presentational requirements of the Companies Act, 1956. Accounting policies not referred to otherwise are consistent with generally accepted accounting principles.”

    Policy no. 11 in Schedule 10: Terminal and other service charges

    “Freight and handling income/expenses are accounted for at the ti me of booking of containers. Ground rent and wharfage are accounted for at the time of release of containers on ‘completed service contract method’. Claims/penalties are accounted for at the time of settlement.”

    5. Comptroller and Auditor General of India (C&AG) while issuing comments under section 619(4) of the Companies Act, 1956, on the accounts of the company for the financial year ended on 31st March, 2001, issued a half-margin on revenue recognition by the company which stated as below:

    “Terminal and other service charges of Rs. 1,07,479.75 lakh on the income side in the profit and loss account include a net income of Rs. 6,911.76 lakh towards ground rent after deducting ground rent waived/ discounts given to various parties amounting to Rs. 336.53 lakh. Thus, the company had not only contravened the statutory requirements laid down in Part II of Schedule VI to the Companies Act, 1956, but had also understated the income as well as expenditure to the extent of Rs.
    336.53 lakh.”

    6. The management of the company had given the following reply to the half-margin issued by the C&AG:

    “The Accounting Standard (AS) 9, ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, provides for two methods of recognising revenues from services – (i) Proportionate completi on method and, (ii) Completed service contract method. In the secon d method, revenue is recognised in the statement of profit and loss only when the rendering of service under a contract is completed or is substantially completed. In line with the requirements of AS 9, the company has adopted accounting policy no. 11 pertaining to terminal and other service charges which provides that the accounting for ground rent is done at the time of release of containers on completed service contract method”.

    7. According to the querist, the company has been giving waiver of ground rent to its customers on the basis of commercial considerations. In some of the cases, waiver is granted before the billing is done to the party. According to accounting policy no. 11 on ‘Terminal and other service charges’ of the company, ground rent is accounted for at the time of release of containers on ‘completed service contract method’. Since the amount of ground rent expected to be realised is ascertained at the time of release of containers, customer is billed with the amount realisable on account of ground rent. The money so realised is credited to the concerned income head. As per the querist, such an accounting procedure is clearly justifiable in terms of provisions laid down in clause 9.1 of AS 9 which states that revenue should be measurable and that at the time of sale or rendering of the service it should not be unreasonable to expect ultimate collection. Therefore, income from ground rent is shown in the statement of profit and loss at the amount ultimately realisable from the customer.


    8. As per the querist, accounting for waiver granted to the customers has been a matter of discussion several times and as stated above, the government auditors have also raised this matter during the audit for the financial year 2000-01. An assurance was given to the government auditors that the treatment of waiver would be reviewed during the current year. Accordingly, the company has decided to seek opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India in this matter.

    B . Query


    9. The querist has sought the opinion of the Expert Advisory Committee as to whether the accounting policy being followed by the company with regard to accounting for ground rent, as detailed in paragraph 7 above, is in compliance with the provisions of the Companies Act, 1956, and AS 9.

    D. Opinion


    On the basis of the above, the Committee is of the opinion that the accounting policy followed by the company with regard to ground rent is not in compliance with the provisions of the Companies Act, 1956, and AS 9. The revenue from ground rent should be recognised on straight line basis over the period during which a container remains parked in an ICD of the company after the expiry of the permissible free time limit provided no significant uncertainty as to its measurability or collectability exists.

    Opinion finalised by the Committee on 20.1.2003

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