1.17 Query: Accounting of sales and purchases made by business associates of a company. 1. A central public sector undertaking is registered under the Companies Act, 1956, and is carrying on the business of exports, imports and domestic trade. Having vast network of offices in India and abroad, it carries on the trade with the association of business associates in India.
2. Exports of the company fall under the following categories: -
(a) Contract or Letter of Credit is in the name of company and shipments are made by the company.
(b) Contract or Letter of Credit is in the name of the company, but assigned to the associates and shipments are made by them ‘Account Company’.
(c) Neither contract nor letter of credit is in the name of company, but shipments are made by the associates and documents are marked ‘Account Company’.
(d) Exports are made by Indian exporters under counter trade obligations for imports by Government and other public sector units and documents are marked ‘Account Company’. The company is appointed by the Government as nodal point for monitoring the counter trade obligations through memorandum of understanding between the company and foreign supplier.
3. Where exports are against contract and letter of credit in the name of the company, such transactions are reckoned as direct exports of the company.
4. The exports of business associates reckoned as indirect exports are accounted for as company’s sales on fulfillment of any of the following conditions: -
(i) Where the contract between the buyer and the seller clearly shows that the business has been concluded through the intervention of the company.
(ii) Where the export by a business associate is based on enquiry passed on by the company or in continuation of business resulting from previous enquiry from the same buyer for the same item.
(iii) Where there is some documentary evidence to show that the buyer was put in touch with the seller through the intervention of the company as a result of which export business materialised.
5. The above position is disclosed in the Statement of Significant Accounting Policies of the company. Further, the following specific remarks are also incorporated in the ‘Notes Forming Part of Accounts’ of the company:
“Net sales include exports effected by the associates amounting to Rs._____ crores in respect of which Contract and Letter of Credit is not in the name of the company and documents are marked ‘Account Company’.”
6. The company has been following consistently the above accounting policy and disclosure in the ‘Notes Forming Part of Accounts’ since long. Principal Director of Commercial Audit and ex-officio Member, Audit Board, Indian Audit and Accounts Department, has objected to the booking by the company of sales and purchases of the associates where the contract and Letter of Credit are not in the name of the company as company’s own on the grounds that:
(a) The company is entitled to only service margin and commission on these sales. Consequently, the turnover of the company is being artificially inflated and the extent of its trading activities is being mis-represented.
(b) The benefits of the imports and exports accrue and are availed of by the associates.
(c) The accounting policy of the company is against the Accounting Standard (AS) 9 on ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India. The querist has stated that the Indian Audit and Accounts Department, therefore, has sought for amendment to the accounting policy of the company.
7. The querist, however, is of the view that inclusion of exports of business associates in the company's turnover as per its accounting policy subject to fulfillment of certain conditions and disclosure of the same in the ‘Notes Forming Part of Accounts’ as stated above is in order, taking into account the position that the business materialises through the intervention and efforts of the company and there is no agency relationship between the company and its associates.
8. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Whether the accounting policy of the company in regard to accounting of export of business associates (referred to under the category (c) at para 2) as company’s sales and also disclosure of the same in the ‘Notes Forming Part of accounts’ is in order.
(ii) In case the answer to (i) is in the affirmative, whether any further disclosure is called for.
(iii) In case the answer to (i) is in the negative, what should be the correct treatment of the exports of business associates in the accounts of the company.
Opinion December 9, 1996
1.The Committee notes that paras 10 and 11 of Accounting Standard (AS) 9 on ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, state as below:
“10. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.
11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.”
2. As per the above requirements, it is an essential condition for recognition of revenue from sale of goods that significant risks and rewards of ownership in the goods should be transferred to the buyer. In other words, significant risks and rewards of ownership at the time of effecting the sale should vest in the (designated) seller (and not in another party). Unless this condition is satisfied, a sale cannot be recognised by the seller. Therefore, in determining the proper accounting treatment of an export transaction which is handled by a trading company, it must be ascertained whether the significant risks and rewards of ownership first get transferred from the associate to the company in question and then from such company to the overseas buyer. If it is not so, the transaction does not constitute a sale (export) of the trading company and should not be so recognised; instead, the company should recognise only the service margin/commissions earned by it for effecting the transaction.
3. The Committee is of the opinion that the question whether significant risks and rewards of ownership are transferred to the trading company and thereafter to the buyer is to be determined on the basis of the facts and circumstances of the particular case. For instance, the mere fact that certain documents like contracts with the overseas buyer, letters of credit, bills of lading, and insurance documents are marked “Account (name of the concerned trading company)” does not by itself establish that the significant risks and rewards of ownership are transferred first to the trading company and then to the overseas buyer. The company, therefore, can not book sales in such cases and should only recognise its service charges/commission as the turnover. ______________________ |