1.26 Query: Accounting policy for booking of turnover of canalised items.
1. The company in question is a Government of India Undertaking under the administrative control of Ministry of Textiles and is permitted under Chapter VIII of the Export-Import Policy to:
(a) Export gold and silver jewellery and articles against gold and silver supplied by the foreign buyer.
(b) Export gold and silver jewellery and articles by organising the approved exhibitions.
The above exports are made by the company through associates.
2. Under the scheme at (a) above (Chapter VIII, Para 88A of the Export and Import Policy 1992-1997) the company is presently not engaged in the business of directly booking orders. The orders are received by and executed by the associates themselves. The company renders the following services:
* Tri-partite contract signed by the foreign buyer (first party), the company (second party) and manufacturing associates (third party). The contract provides, as per para 150(4) of the Hand Book of Procedures.
“The Business Associate authorises the company to act as its agent to file the bill of entry and collect the imported gold from the customs and also to file the relevant shipping bill, for making corresponding exports through the customs.”
Further, in the registration of contract for export of gold jewellery, it is provided:
“Contract is between the seller/exporter and buyer/importer on a principal to principal basis and the company is to act merely as the agent of the seller/exporter.” (as per Para 150(4) of the Hand Book of Procedures).
* The advance gold is received in the name of the company which is subsequently transferred to the associates after the exports have been made. As such, there is no sale and purchase transaction with reference to the gold imported.
* Moreover, in case of above exports through associates, the foreign exchange (sale proceeds) is received by the associates directly and the service charge is remitted to the company in Indian Rupees.
3. For the above services rendered by the company, service charges paid in Indian Rupees are received from the associates.
4. Under the scheme at para 1 (b) above (Chapter VIII Para 88-B of the Export and Import Policy 1992-97) the company exports gold and silver jewellery and articles through sales at exhibitions abroad organised by the company as one of the nominated agencies. Following services are rendered to the associates in this connection:
* Bi-partite contract signed by the associates and the company. The contract provides:
“The contract shall not be construed as one of agency between the company and the associates…..”
* Obtaining permission from the relevant authorities in India and abroad.
* Appointing service agencies abroad and making payments thereof. In this connection, the company repatriates foreign currency from the EEFC Account to meet the expenses in connection with the organisation of the exhibitions.
* Organise and conduct sales and exhibitions abroad.
* In this connection, the associates consign the jewellery in the name of the company and the relevant GRI liability is made out in the name of the company. Cash Memos are made by associates in the name of the company and sales proceeds are accounted for by the company. The sales proceeds, after meeting expenses on behalf of associates, are repatriated back to the company’s account in India.
* It may be mentioned for the above transactions, no stock entries are made for the jewellery consigned in the company’s name, subsequent sale, re-import and delivery of unsold jewellery to the associates.
* The unsold jewellery is reimported back to India and the GRI liability is discharged subsequently to the company.
5. For the above services rendered by the company, it charges the following:
* Fixed participation fee in Indian Rupees.
* Service charges in foreign currency on sales effected by the associates.
6. The sales under schemes (a) and (b) referred to in para 1 above, are accounted for as the company’s sale and the difference between the sale price and service charges are accounted for as the company’s purchases. This is reflected in the Notes on the accounts as below:
“Net sales Rs. 5362.76 lakhs (previous year Rs. 6088.45 lakhs) which represent export of gold and silver jewellery booked on the basis of documents marked account company. The export orders and export invoices in these cases are in the name of Associates. Correspondingly, purchases amounting to Rs. 5181.31 lakhs (previous year Rs. 5875.33 lakhs) have been booked on the basis of invoice value reduced by the amount of service charges. The difference between purchases and sales represents service charges earned by the corporation.”
7. Further, the following is incorporated in the Accounting Policies:
“Revenue Recognition
Export sales are accounted at FOB Value:
* Of business associates, on receipt of export documents from associates marked account company.”
8. The corporation has been, in the past, following consistently the above accounting policy with disclosures made in the notes forming part of accounts. However, the statutory auditors have qualified the above accounting of sales in the auditors’ report on the annual accounts for 1994-95, as under:
“The corporation has booked sales of Rs.5362.76 lakhs and purchases of Rs. 5181.31 lakhs of business associates as its own sales and purchases as given in note no. 6 of schedule 22 forming part of the accounts”.
9. The Principal Director of Commercial Audit and Ex-officio Member, Audit Board, Indian Audit and Accounts Department, has also objected to the booking by the company of sales and purchases of the associates, where the contract/letter of credit is not in the name of the company as company’s own, on the following grounds:
(i) The company is entitled to only service margin/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.
(ii) The benefits of the imports/exports accrue and are availed of by the associates.
(iii) The accounting policy of the company is against mandatory Accounting Standard (AS) 9 on ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India.
Accordingly, Indian Audit and Accounts Department has sought for amendment in the accounting policy of the Company.
10. 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.
11. 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 exports of business associates 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 January 2, 1997
1. The Committee notes that para 4.1 of Accounting Standard (AS) 9 on ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, defines the term ‘Revenue’, inter alia, as below:
“In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration.”
2. The Committee notes that in respect of export of gold and silver jewellery and articles against gold and silver supplied by the foreign buyer (scheme as per para 1 (a) of the query), the “contract is between the seller/exporter and the buyer/importer on a principal to principal basis and [the company in question] is to act merely as the agent of seller/exporter” (as per para 2 of the query). Also, the company is receiving only the service charges in respect of such transactions. In view of the definition of term revenue reproduced in para 1 above, only the amount of service charges received by the company should be recognised as revenue. Accordingly, booking of sales and purchases (net of service charges) by the company is improper.
3. With regard to export of gold and silver jewellery and other articles by organising the approved exhibitions (the scheme as per para 1 (b) of the query) 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.”
4. 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. 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 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.
5. On the basis of the above, the opinion of the Committee on the issues raised in para 11 of the query is as follows:
(i) Please see paras 2 and 9 above.
(ii) Answer to (i) is not in the affirmative.
(iii) Correct treatment has been explained in paras 2 and 4 above. ____________________________
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