Query No. 35

 

Subject:           

Accounting treatment of training fees and

registration fees received in advance.1

 

A. Facts of the Case

 

1. A company has a computer training institute. The training periods of various courses are different and courses are run for different batches. The  duration  of  different  courses  is  three,  six,  nine,  twelve,  eighteen months,  etc.  The  training  fees  for  the  courses  are  payable  either  in lumpsum or in instalments in addition to admission fees.

 

2. According  to  the  querist,  the  company  is  maintaining  mercantile/ accrual system of accounting as mentioned in Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’, issued by the Institute of Chartered Accountants of India. Training fees for courses relating to more than one accounting year is treated by the company as advance training fees and deferred to the next financial year.

 

3. The company determines the current year’s revenue by adding the previous  year’s training fees received  in  advance, in  the current  year’s fees  and  reducing  the  current  year’s  training  fees  received  in  advance therefrom. This system has been followed by the company consistently. The  querist  has  stated  that  according  to  Accounting  Standard  (AS)  9, ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, revenue from tuition fee should be recognised over the period of instruction.

 

4. In  the  context  of  revenue  recognition,  the  querist  has  stated  that irrespective  of  the  company  getting  or  not  getting  new  students  in subsequent years, previous unfinished courses have to be completed against which fees have already been received. The completion of these courses entails  the  expenses  for  books,  salaries  of  members  of  faculty,  other training and administrative expenses, etc.

 

5. The  company  has  appointed  some  franchisee  centres  at  different places  in  the  eastern  region.  The  company  grants  licence  for  certain number of  years (as per  the agreement) to  the franchisee for  using the company’s brand name and full assistance of technical know-how in the field of providing education and training in information technology and to  use  intellectual  property  for  which  the  company  takes  registration fees. The registration fee is payable either in lumpsum or in instalments and is non-refundable.

 

6. The  registration  fee  is  received  for  using  the  brand  name  of  the company, full assistance of technical know-how and maintaining the proper standard of education and research in information technology from time to time and also for set-off of losses on account of non-payment or short payment of other revenues receivable from the franchisee. It also covers all expenses to run a franchisee centre if the said centre is closed before the completion of any course or terms of agreement. The company is not aware of the future contingent liability which may arise for these reasons.

 

7. The company allocates the total amount of registration fees over the period of franchisee agreement. For example, if the franchisee agreement is  say  for  five  years  and  agreement  is  signed  in  April  2000  or  March 2001, 1/5th   of the registration fees is  considered as the revenue for the year ended March 31, 2001 and the balance 4/5th  of the registration fees is  treated as  registration  fees  received in  advance  and  deferred to  next year and  1/5th   of  the  total  registration fees  is  recognised  as  revenue  of each year, for balance number of years.

 

8. The company also takes a percentage of course fees or fixed amount as royalty against advertisement cost, sale of study materials, software, prospectus, bags, printed materials, etc., and fees for re-orientation training of faculty and any other service rendered to them.

 

B. Queries

 

9. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

 

(a)        Whether the accounting treatment of the training fees received in advance is justifiable or not.

 

(b)        Whether  the  accounting  treatment  of  registration  fees  is justifiable or not.

C. Points considered by the Committee

 

10. The Committee has examined the query only from the point of view of preparation of financial statements for the purpose of reflecting true and  fair  view  of  the  financial  position  and  the  profit  or  loss  of  the company.  Further,  the  Committee  has  examined  only  the  accounting treatment of training fees received in advance and of ‘registration fees’ for which specific queries have been raised in paragraph 9 above. The Committee has not examined any other accounting issue contained in the facts of the case, for example, accounting treatment of ‘royalty’ or any other fees received as described in paragraph 8 above, as no query has been raised in that respect.

 

11. The  Committee  notes  that  paragraph  12  of  Accounting  Standard (AS) 9, ‘Revenue Recognition’, provides as below:  

“12. In a transaction involving the rendering of services, performance should  be  measured  either  under  the  completed  service  contract method  or  under  the  proportionate  completion  method,  whichever relates  the  revenue  to  the  work  accomplished.  Such  performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.”

 

12. The Committee further notes that in respect of the different courses run  by  the  company,  the  work  is  accomplished,  as  contemplated  in paragraph 12 of AS 9 reproduced above, over the period of instruction. Therefore,  for  recognition  of  revenue  in  respect  of  these  courses,  the proportionate completion method would be appropriate. The Committee also notes in this regard that the Appendix to AS 9, which illustrates the application of the Standard to certain commercial situations, also states that  revenue  in  respect  of  tuition  fees  should  be  recognised  over  the period of instruction.

 

13. From the above, the Committee is of the view that the accounting treatment  followed  by  the  company  in  respect  of  training  fees  is  not appropriate since, from the facts of the case it appears that the company is following the completed contract method. Accordingly, in the view of the  Committee,  revenue  from  training  fees  for  the  courses  should  be recognised  proportionately  over  the  period  of  instruction,  i.e.,  if  the duration  of a  particular  course  is, say,  9  months,  and on  31st   March,  3 months’ training has been imparted, the revenue to be recognised for the period upto 31st  March would be 1/3rd   of the total tuition fees received. The  balance  2/3rd   of  the  tuition  fee  should  be  treated  as  tuition  fees received in advance for that period. The same should be recognised as revenue in the next year.

 

14. The Committee notes that paragaph 8.1 of AS 9 defines royalty as “charges  for  the  use  of  such  assets  as  know-how,  patents,  trade  marks and copyrights”. The Committee also notes from paragraph 5 above that the  registration  fee  is  received  by  the  company  under  the  franchisee agreement for use of its brand name, technical know-how, etc. Thus, the Committee is of the view that the registration fee received by the company is of the nature of royalty for use of its resources.

 

15. The  Committee  notes  that  the  accounting  treatment  in  respect  of royalty is  prescribed in  paragraph 13 of  AS 9.  The relevant  portion of paragraph 13 is reproduced below:

 

“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:

.....

 

(ii)  Royalties : on an accrual basis in accordance with

the terms of the relevant agreement.”

 

16. The Committee notes from the facts of the case that the registration fee as described in paragraph 14 above, is received by the company for use of its resources for a specified period of time stated under the terms of the agreement. The registration fee is in substance an advance payment by the  franchisee  for  the  right  to  use  the  asset  for  a  defined  period  of time.  On  the  basis  of  paragraph  13  of  AS  9  reproduced  above,  the Committee is of the view that the revenue from registration fee should be recognised  on  a  time  proportion  basis  over  the  period  of  agreement, unless  having  regard  to  the  substance  of  the  transaction,  it  is  more appropriate to recognise revenue on some other systematic and rational basis. For example, if a franchisee agreement for 5 years is entered into on 1st  January, 2001, the revenue to be recognised for the year ending 31st March, 2001, should be the proportionate registration fee for a period of 3 months; and not one-fifth of the total registration fee as is being done by the company.

 

D. Opinion

 

17. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 9:

(a)        The accounting treatment followed by the company in respect of  training  fees  received  in  advance  is  not  justifiable.  The training  fees  should  be  recognised  on  accrual  b as is proportionately over the period of instruction.

 

(b)        The accounting treatment followed by the company in respect of registration fees is not justifiable. The registration fees should be  recognised  on  a  time  proportion  basis  over  the  period  of agreement.

1Opinion finalised by the Committee on 19.8.2001.