Expert Advisory Committee
ICAI-Expert Advisory Committee
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Query No. 11

 

Subject :    

  Accounting for income received on units of Unit

Scheme-64 of the Unit Trust of India.[1]

A. Facts of the Case

 

1. A public sector company invested a certain amount in the Unit Scheme-64 of the Unit Trust of India during the period December 1993 to July 1997.

 

2. The financial year of the Unit Trust of India for determination and declaration of surplus income to its unit-holders is July 1 to June 30.  This amount is normally received by the company in the month of August immediately following the month of declaration.

 

3. According to the querist, the company had been accounting for the income distributed by the Unit Trust of India on actual receipt basis for accounting years upto 1995-96.  The statutory auditors for the year 1995-96 were of the opinion that recognition of such income on the basis of actual receipt contravened the provisions of section 209(1)(d) of the Companies Act, 1956.  As per the querist, the auditors were of the opinion that as per the requirements of Accounting Standard (AS) 4, ‘Contingencies and Events Occurring after the Balance Sheet Date’, the income received after the balance sheet date but before finalisation of accounts could be recognised as income.  However, the company was of the opinion that the income distribution from the Unit Trust of India on Unit Scheme-64 had no relationship to the holding period and, therefore, unlike interest, this could not be bifurcated over a period for purposes of its accounting on accrual basis.

 

4. The querist has informed that from the year 1996-97, the company nevertheless started accounting for this income in accordance with the opinion of the statutory auditors.

 

5. During the course of audit of accounts for the year 1997-98, the government auditors objected to the method of accounting being followed by the company.  According to them,

 

(a) income from distribution of surplus under US-64 falls under the category of ‘dividend’;

 

(b) the right to receive dividend arises only when it is declared; and

 

(c) as per Accounting Standard (AS) 9, ‘Revenue Recognition’, the revenue in respect of dividends should be recognised only when the right to receive the payment is established.

 

6. According to the querist, the treatment considered appropriate by the government auditors was, in fact, the one being followed by the company uptill 1995-96.

 

B. Query

 

7. The querist has sought the opinion of the Expert Advisory Committee as to the correct method of accounting for the income received from investment in US-64 of Unit Trust of India.

 

C. Points Considered by the Committee

 

8. The Committee notes that a mutual fund creates its corpus for investment purposes from the contributions of the public.  The corpus is divided into units of designated denomination which is usually Rs.10 each.  The units thus represent the interest of the unitholders in a scheme, each unit representing one undivided share in the assets of a scheme.  The return on units is neither certain nor fixed.  In the above respects, a unit is akin to a share of a company and accordingly, the nature of income thereon is similar to that of dividend (rather than that of interest).  In this regard, the Committee notes that the Eleventh Schedule to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, also refers to the distribution of surplus by mutual funds as ‘dividend’.

 

9. The Committee notes that Accounting Standard (AS) 9, Revenue Recognition, states the following with respect to treatment of dividend income.

 

“13. Revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists.  These revenues are recognised on the following bases:

 

.......

(iii)  Dividends from investment in shares : when the owner’s right to receive payment is established.”

 

10.   In view of the requirements of AS 9 referred to above, the Committee is of the view that accounting for dividend income before the time when the unit holder’s right to receive the payment thereof is established is not correct.  Such income should be recognised only when the unit holder’s right to receive the payment thereof is established.

 

D. Opinion

 

11. Based on the above, the Committee is of the opinion that income on units of US-64 of Unit Trust of India should be accounted for at the time when the unit holder’s right to receive the payment thereof is established, i.e., at the time of declaration.  Thus, such income should be included in the profit and loss account of the year in which the declaration is made by the Unit Trust of India.

 

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[1] Opinion finalised by the Committee on 4.3.1999.