Expert Advisory Committee

1.24 Query:

Treatment of disputed amounts of telephone bills pertaining

to earlier years, finally settled in current year.

1. A company has been controlling the operations of the Telecom Network except telegraphs in Delhi and Bombay. The telephone bills ae issued bimonthly for various services provided to the subscribers. The services include Local/STD calls, Trunk Calls, Phonograms, ISTD Calls, and various other value added services. In certain cases, the company receives complaints from the subscribers regarding excess billing, wrong billing etc. These complaints are thoroughly scrutinised and examined by various authorities. The complaints are disposed off at various levels in accordance with powers delegated to each level. The subscriber can appeal to the Appellate Authority for review of the decisions. Sometimes, they seek remedies in the court of law. In some cases, subscribers do get rebate of call charges after a protracted legal battle. As such decisions in courts and departmental proceedings take more than a year, it gives rise to the occasions of effecting adjustments in bills pertaining to earlier year or years.

2. The querist has informed that the company has formed an accounting policy that claims by subscribers for alleged wrong billing should be accounted for in the year in which finally determined as prior period adjustments. The corresponding network charges which were paid already to the Department on such amounts were also adjusted accordingly to prior period adjustments. This policy has been framed as per the querist because the said claims do not pertain to the current year and it is not correct to adjust the claims relating to previous years in the current year’s income/expenditure. However, in cases where the claims relate to and settled in the current year, the same are accounted for in the current year.

3.The querist has further informed that since the company receives a large number of cases for alleged wrong billing most of which may be fictitious, it is difficult to quantify the actual amount to be settled and make provisions in the accounts. The company therefore has been indicating the same in the Notes to Accounts, under ‘Contingent Liabilities’, along with the statement that the amount is indeterminate.

4. As per the querist, the CAG of India has commented on the accounts of the company for the year 1993-94 as follows on the above matter:

“In accordance with its accounting policy No. 3, the company has been adjusting the claims for alleged wrong billing in the year of determination through prior period adjustments. As such claims are a regular feature of the company’s business, they should have been treated as income/expenditure of the current year and not prior period adjustments, in terms of Accounting Standard 5 issued by the I.C.A.I.”

5. In the views of the querist, as per Accounting Standard 5, prior period items are material charges or credits which arise in the current period as a result of errors or omissions in the preparation of financial statements of one or more prior periods and are generally infrequent in nature. Though the items involving adjustment of claims of subscribers at a much later date are neither infrequent in nature nor do they arise out of errors or omissions in the preparation of the financial statements of one or more periods but the fact remains that such cases affect adjustment of subscriber’s bills pertaining to earlier years as already mentioned in para 1. As it is a deviation from the accounting policy, the management of the company has decided to seek the opinion of the Institute as regards applicability of AS-5.

6. The querist has sought the opinion of the Expert Advisory Committee as to whether the company can adjust the amounts of such cases, which actually pertain to previous years but settled in the current year in the current year’s income/expenditure as suggested by CAG of India instead of prior period adjustments

Opinion February 1, 1996

1.The Committee notes paras 3.1 and 5.1 of Accounting Standard (AS) 5 on ‘Prior Period and Extraordinary Items and Changes in Accounting Policies’, issued by the Institute of Chartered Accountants of India, as below: -

“3.1 ‘Prior period items’ are material charges or credits which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.

5.1 Prior period items are generally infrequent in nature. They should not be confused with accounting estimates which are, by their nature, approximations that may need correction as additional information becomes known in subsequent periods. The charge or credit arising on the outcome of a contingency, which at the time of occurrence could not be estimated accurately, does not constitute the correction of an error but a change in estimate. Such an item is not treated as a prior period item.”

2. The Committee further notes the definition of ‘contingency’ as given in para 3.1 of (AS) 4 on ‘Contingencies and Events Occurring After the Balance Sheet Date’ as follows:

“A contingency is a condition or situation the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence, of one or more uncertain future events.”

3. The Committee is of the view that the claim for wrong billing is a contingency in view of the definition of the term as per AS 4 given in para 2 above, In view of this, the Committee is of the opinion that in the year in which the claims are made, appropriate provision should be made in respect of the estimated liability based on the past experience etc., in this regard. To the extent the claims are not provided for, these should be disclosed as a contingent liability. In the year of settlement of claims, necessary adjustments should be made, e.g., in case the claims are in excess of the provision already made, the excess should be provided for in the profit and loss account as expenditure of that year. In no case, the claims should be treated as a prior period item.

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