Query No. 41
Subject: Recovery of deposits - apportionment between interest and principal.[1] A. Facts of the Case
1. A public sector company (hereinafter referred to as ‘the company’) is recognised as a public financial institution under section 4A of the Companies Act, 1956. The company is engaged in providing finance to housing sector in the country.
2. The company had placed some surplus funds with a wholly owned subsidiary of a nationalised bank. On maturity, the other company defaulted in payment of principal and interest.
3. As a result of intervention of the central government, the company has recently entered into an agreement with the defaulter company. Under the agreement, the defaulter company has agreed to clear its dues by paying interest on all the deposits upto an agreed date, which is a date after the date of maturity but before the date of settlement. In accordance with the agreement, 20 percent of the total amount due (principal plus interest upto the agreed date) has been received during the year 1998-99 and the balance amount is to be received in seven equal yearly instalments. The agreement does not contain any stipulation regarding adjustment of a particular instalment against principal amount or against interest or additional interest.
4. Interest on defaulted deposits upto the date of maturity has already been booked by the company in earlier years. However, the company has not accrued interest for the period from the date of maturity to the agreed date (hereinafter referred to as ‘additional interest’) receivable from the defaulter company.
B. Query
5. The opinion of the Expert Advisory Committee has been sought as to whether the company should account for the amounts received from the defaulter company (a) first as recovery of additional interest and the balance as recovery of the composite amount of principal and accrued interest, or (b) as recovery of additional interest and recovery of the composite amount of principal and accrued interest in the proportion that the amounts received bear to the total amount due.
C. Points Considered by the Committee
6. The Committee wishes to emphasise that its opinion is purely from accounting point of view and not from the view point of any statute that may require apportionment of the amounts received in a particular manner.
7. The Committee notes paragraphs 9.1 and 9.2 of Accounting Standard (AS) 9, ‘Revenue Recognition’ which state as under:
“9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection.”
“9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by instalments.”
8. The Committee notes that as per paragraph 9.2 of AS 9 reproduced above, it is not appropriate to recognise revenue until ultimate collection thereof is reasonably certain. The Committee is of the view that a mere agreement between a lender and a borrower in default for payment of the amounts due does not by itself render the ultimate collection of those amounts reasonably certain. The management needs to assess the ultimate recoverability taking into account all the relevant factors. The nature of involvement of the central government in bringing about the agreement between the company and the defaulter company would be one such factor to be considered by the management in the instant case.
9. If, under the facts and circumstances of the case, the company considers
the ultimate collection of amounts due from the defaulter company to be
reasonably certain, the company should recognise additional interest upon
entering into the agreement with the defaulter company.
10. The Committee is further of the view that once the additional interest is recognised by the company by a corresponding debit to the defaulter company, there remains no distinction between principal amount, interest and additional interest. Any recovery would automatically be adjusted against the composite amount due from the defaulter company.
D. Opinion
11. On the basis of the above, the Committee is of the opinion that if, under the facts and circumstances of the case, the ultimate collection of amounts due from the defaulter company can be considered to be reasonably certain, the company should recognise additional interest upon entering into the agreement with the defaulter company. The recoveries should be adjusted against the composite amount due from the defaulter company.
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[1]Opinion finalised by the Committee on 14.1.2000 |