Query No. 26
Subject: Disclosure of amount received from LPG consumers under “Tatkal Scheme”.[1] A. Facts of the case
1. As per the directive of Ministry of Petroleum and Natural Gas vide their communication no. P-17011/6/95-MKT dated 30.3.1995, tatkal LPG connection to the eligible category of applicants (as per the criteria prescribed by the Ministry from time to time) are released by oil companies. Under the scheme, the applicants have to make a one-time payment of non-refundable lumpsum amount (presently Rs.4000). This lumpsum payment by the applicants seeking LPG connection under the tatkal scheme is in addition to the normal security deposit for the loaned equipments, viz., LPG cylinder and regulator, as is applicable for any domestic consumer. Accordingly, such lumpsum amounts were collected and LPG connections released to consumers by an oil company (hereinafter referred to as ‘the company’) under the tatkal scheme. The lumpsum amounts so collected were shown by it as liability under the head ‘Current Liability and Provisions’.
2. In view of the appreciable collection made by the oil companies through release of LPG connections under the tatkal scheme, the Ministry directed each of the oil companies in 1997 to create a separate fund for depositing the amount collected by them under the tatkal scheme. The Ministry specified that the fund would be utilised for development of LPG infrastructure.
3. Subsequent to this directive, the lumpsum amount collected against the release of tatkal LPG connections were re-classified by the company as ‘Sundry Creditors’.
B. Queries
4. The opinion of the Expert Advisory Committee has been sought on the following issues:
C. Points Considered by the Committee
5. The Committee notes that the ‘Guidance Note on Terms Used in Financial Statements’ issued by the Institute of Chartered Accountants of India defines the term ‘liability’ as “the financial obligation of an enterprise other than owners’ funds”.
6. The Committee notes that the company has treated the non-refundable amount received under the tatkal scheme as a liability and classified the same in the balance sheet under the head “Sundry Creditors”.
7. The Committee observes that a receipt from a customer in the ordinary course of business gives rise to a liability, if it entails financial obligations for the enterprise, i.e., it requires the enterprise to transfer assets or provide services in future. The Committee is of the view that in the instant case, the lumpsum amount received by the company under the tatkal scheme does not entail any financial obligations for the company and is, therefore, not in the nature of a liability. This view of the Committee is based on the following:
8. The Committee also takes note of Accounting Standard (AS) 9, ‘Revenue Recognition’. The appendix to the said Standard states the following with regard to the treatment of membership fees received by service-rendering organisations :
“6. Entrance and membership fees.
....... 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.”
While the Committee notes that the company is engaged in sale of products rather than rendering of services, it is of the view that the characteristics of the lumpsum amount received by the company under the tatkal scheme are similar to the membership fee in a case where the other products/services are to be paid for separately. Both give rise to merely an entitlement for a customer to receive certain products or services against payment of the price. Accordingly, as stated in AS 9, such lumpsum amount should be treated as an income at the time of receipt.
9. The Committee takes note of paragraph 12 of Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’ which provides as below:
“12. When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.”
Considering the fact that the nature of the lumpsum amount received under the tatkal scheme is different from the normal sale proceeds of LPG, the Committee is of the view that it is necessary to disclose the nature and amount of the receipt separately in the financial statements, if the amount involved is material.
10. The Committee takes note of the directive received by the company from the administrative machinery that the lumpsum amount collected under the tatkal scheme should be kept in a separate fund to be used for development of LPG infrastructure. The Committee is of the view that this directive does not alter the nature of the receipt, viz., income. The Committee is further of the view that the objective of keeping the amount in a separate fund can be met by transferring an equivalent amount from the profit and loss appropriation account to a special fund account.
D. Opinion
11. Based on the above the Committee is of the following opinion on the queries raised in paragraph 4 above:
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[1] Opinion finalised by the Committee on 23.7.1999
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