Expert Advisory Committee
ICAI-Expert Advisory Committee
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Query No. 1

Subject:

Revenue from unmanned Public Call Offices (PCOs).1

A. Facts of the Case

 

1.A public sector company has installed unmanned PCOs at public places for providing telephone services to public. Any person can make a local call by dialing the wanted number from a PCO after inserting a one rupee coin in the Coin Box fitted with the instrument. The actual collection from unmanned PCOs is booked as revenue in the accounts of the company, i.e., such revenue is accounted for on cash basis.

 

 

2. The accounting policy of the company states that, "The accounts are prepared under the historical cost convention adopting the accrual method of accounting except income from unmanned PCOs, which is accounted for on cash basis."

 

 

3. The querist has stated that the exchange records of total calls generated by a PCO do not tally with the actual amount collected. The difference is due to misuse by the callers, test calls and misappropriation, etc. According to the querist, it is impossible to trace the miscreants. Due to these reasons, the whole amount of metered calls is not taken into consideration and only actual collection for the year is booked as revenue in the books of account of the company.

 

 

4. The querist has stated that in case the company considers revenue from unmanned PCOs for the financial year 2002-03 on the basis of metered calls instead of cash basis, this would result in overstatement of revenue by Rs. 93,85,457, which is 0.015% of the total revenue of the company for the financial year 2002-03. Thus, the company will have to pay an additional license fee of Rs. 1,126,254 @ 12% of the additional revenue of Rs. 93,85,457 due to overstatement. This constitutes 0.02% of the total license fee of Rs. 5,818.16 million of the company.

 

 

5. The company has justified booking actual collections from unmanned PCOs as its revenue on the ground that if the revenue is accounted for on the basis of metered calls, the same has to be written off eventually as there is no possibility of recovery of any dues. Moreover, the write off is a lengthy and time consuming procedure.

 

 

B . Query

 

6. The querist has sought the opinion of the Expert Advisory Committee as to whether the company is justified in booking actual collections from unmanned PCOs as its revenue.

 

 

C. Points considered by the Committee

 

7. The Committee notes that Accounting Standard (AS) 9, ‘Revenue Recognition’, requires recognition of revenue from rendering of services in accordance with paragraphs 9.2, 10 and 12 reproduced below:

 

 

"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."

 

 

"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."

 

 

"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."

 

 

8. The Committee notes that in the present case the service is rendered by the company on making of a call by the customer. In view of this, as per the principles laid down in AS 9, the revenue is earned as soon as a call is made. However, on the balance sheet date, in respect of certain calls, the amount is not expected to be received because of the reasons specified by the querist in paragraph 3. Keeping in view the requirements of paragraphs 9.2, 10 and 12 of AS 9, revenue should not be recognised to the extent it is expected, on the basis of the past experience, that cash will not be received on account of such calls. In other words, revenue should be recognised to the extent expected to be realised. Thus, it would not be appropriate to postpone recognition of the entire amount of revenue from unmanned PCOs until cash is actually collected.

 

 

9. The Committee also notes paragraph 13 of Accounting Standard (AS) 4, ‘Contingencies and Events Occurring after the Balance Sheet Date’, which provides as below:

 

 

"13. Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate."

 

 

10. On the basis of the above, the Committee is of the view that when revenue is estimated in accordance with paragraph 8 above and cash is actually received after the balance sheet date but before the finalisation of the accounts, the amount of the revenue so estimated and the relevant asset should be adjusted on the basis of the actual collections.

 

 

11. The Committee notes that paragraph 4.3 of the Preface to the Statements of Accounting Standards states that the Accounting Standards are intended to apply only to items which are material. In the present case also, if the amounts are not considered material keeping in view not only the amount of total revenue but the amount of profit/loss etc. also, the revenue in respect of unmanned PCOs may be recognised on the basis of receipt of cash on the ground of materiality. If it is done, it would not be necessary to state the accounting policy in this regard in the ‘Statement of significant accounting policies’ because if the amount is not ‘material’, it cannot be considered as ‘significant’. Even if it is decided to include the accounting policy in this regard in the statement of significant accounting policies, the accounting policy may be drafted as below:

 

 

"The accounts are prepared under the historical cost convention adopting the accrual basis of accounting. However, revenue from unmanned PCOs is recognised on receipt of cash on the ground of materiality."

 

 

Where the above basis is followed on the ground of materiality, it does not mean that accrual basis of accounting is not followed.

 

D. Opinion

 

12. On the basis of the above, the Committee is of the opinion that recognition of revenue on receipt basis is not justified on the grounds stated by the querist in paragraph 5 above. Revenue in respect of unmanned PCOs should be recognied on the balance sheet date to the extent it is expected to be realised. However, in case the amounts are not considered material keeping in view the factors mentioned in paragraph 11 above, the revenue may be recognised on the basis of receipt of cash.

 

 

1Opinion finalised by the Committee on 5.3.2004