Query No. 29

Subject:

Accounting treatment of contribution to ‘Gas Pool Account’.¹

A. Facts of the Case

1. A limited company was incorporated on 16th August, 1984, for procuring, transmission, processing and marketing of natural gas. The company has an authorised share capital of Rs. 1,000 crore out of which Rs. 845.65 crore is paid-up. The Government of India holds 57% equity of the company at present. The company owns over 5,340 Kms. of pipeline and currently transmits about 70 MMSCM per day of natural gas. The company has integrated its business activities and entered into the city gas distribution, exploration of natural gas and telecom business.

2. The pricing of natural gas is presently regulated in terms of Ministry of Petroleum and Natural Gas (MOP&NG) Order No. L-12015/3/94-GP, dated September 18, 1997 (a copy of which has been separately provided by the querist). According to the pricing order, the sale price of natural gas (consumer price) varies between the floor price of Rs. 2150/MCM to the ceiling price of Rs. 2850/MCM based on 75% of the International fuel oil parity price except for concessional prices for north-eastern states. This price is inclusive of gas pool money and forms part of the sale. The company purchases natural gas from joint venture companies at a much higher price, which is linked to International fuel oil parity subject to a ceiling price but selling the same as per the Order on natural gas pricing. The price payable to joint venture companies is market driven and is not governed by Natural Gas Pricing Order dated 18.09.97.

3. MOP&NG Order No. L-12015/3/94-GP dated September 18, 1997 has created a gas pool fund by instructing that:

“An amount of Rs. 250 crore per year will also be deducted by the company from consumer prices collected and the same shall be credited to the ‘Gas Pool Account’ to continue to:

(a) Compensate Oil India Ltd. (OIL) for concessional gas price in the north-east,

(b) Give marketing margin to the company,

(c) Compensate the company/OIL for increase in operating cost, and

(d) For utilisation on research and development (R&D) for exploration and exploitation of small fields.”

4. Out of the consumer price collected by the company, the company retains the amount required to compensate for higher cost of gas purchased from the joint venture companies and the amount of Rs. 250 crore (per annum) for making contribution towards gas pool money. The remainder of the consumer price collected is paid as ‘producer price’ to Oil and Natural Gas Corporation (ONGC)/OIL in proportion to the gas supplied by them.

5. The company accounts for gas pool contribution of Rs. 250 crore every year as purchase and sale price component of natural gas. As per the querist, this fact has been consistently disclosed in the notes to accounts of the company. Paragraph 4(c) of the notes to accounts for financial years from 1997-98 to 2003-04 states that “purchase of gas includes Rs. 250 crore on account of ‘Gas Pool Account’.”

6. The querist has stated that the government auditors have made observations for the first time on this transaction during audit for the financial year 2003-04 by stating as below:

“The purchase of gas includes Rs. 250 crore on account of ‘Gas Pool Account’ as per notes to accounts (No. 4(c)), while the Ministry of Petroleum and Natural Gas vide letter no. L-12015/3/94-GP dated 18.9.1997 stated that an amount of Rs. 250 crore per year would be deducted by the company from the consumer prices collected and the same should be credited to the ‘Gas Pool Account’.

Thus, by including the amount of Rs. 250 crore in purchase of gas and not showing the same as apportioned from sales, the company has overstated both purchases and sales by Rs. 250 crore each.”

7. The management of the company on the above issue has stated as below:

“In accordance with the gas pricing order dated 18.09.1997, the selling price to the end consumer is Rs. 2,850 per MCM of gas linked to calorific value of 10,000 Kcal plus the transportation charges, royalty, taxes and duties on sale of natural gas.

The entire sale proceeds, as referred to above, being collected from end-consumer are being accounted for as sales in the books of account by the company. Gas pool amount of Rs. 250 crore is being collected from the consumer and is being paid to ‘Gas Pool Account’, and duly adjusted in the producer price.”

8. The querist has stated that in this regard, the statutory auditors have observed as follows:

“As per the Sales Tax Act, sales tax is payable on the consideration received or receivable from the purchasers. The selling price of gas is Rs. 2850 per thousand SCM as fixed by MOP&NG, plus the transportation charges, royalty, taxes and duties on sale of natural gas. Since this is the price recoverable from the buyers towards sale of gas, sales tax is payable on this price. The gas pool money can not be deducted from the selling price for the purpose of charging sales tax as it is against the provisions of the Sales Tax Act.”

9. According to the querist, the entire sale proceeds, as referred to above, being collected from the end-consumer are being accounted for as sales in the books of account by the company. Gas pool amount of Rs.250 crore, being collected from the consumer, is being paid to ‘Gas Pool Account’ and is duly adjusted in the producer price. This accounting practice is being consistently followed by the company since 1997-98 as per the pricing order dated 18.09.97. The company is also booking the gas pool money of Rs. 250 crore in the purchase account as this is the cost of gas and the same is recovered from consumer as an integral element of consumer price.

10. The querist has further stated that the company contributes an amount of Rs. 250 crore to Gas Pool Account every year. The board of directors of the company has decided to open a separate bank account and accordingly, separate current account named ‘the company – Gas Pool Account’ was opened with a bank in March, 1999. Gas Pool Account is being maintained by the company on behalf of the MOP&NG. Disbursement from Gas Pool Account is carried out on instructions from the MOP&NG only. The company submits audited claims every quarter against compensation for increase in operating cost to the MOP&NG as permitted by the Pricing Order. The MOP&NG then directs the company for reimbursement from Gas Pool Account against such claims.

11. The government auditors dropped the aforesaid observation at the final stage based on the undertaking that the company would seek the opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India.

12. As per the querist, the existing/proposed accounting treatment does not have any impact on profit/loss for the year to the company.

B. Query

13. In view of the above facts, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) Whether the present accounting treatment along with Note No. 4 (c) in the notes to accounts (Schedule–14) of gas pool contribution which is separately booked through purchases, is correct.

(b) If the answer to (a) above is in the negative, what would be the correct accounting treatment of gas pool contribution?

(c) If the answer to (a) above is in the negative, whether deducting the gas pool contribution from sales/revenue on the face of the profit and loss account would be in consonance with Accounting Standard (AS) 9, ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India.

(d) If the answer to (a) above is in the negative, then what will be the treatment of sales tax, i.e., sales tax will be charged on net or gross of gas pool contribution, keeping in view that gas pool contribution is part of the sale price.

C. Points considered by the Committee

14. The Committee, while expressing its opinion, has answered only the issues raised in paragraph 13 above and has not touched upon any other issue arising from the Facts of the Case, such as, presentation and disclosure of Gas Pool Account in the financial statements, treatment of amount received by the company (reimbursement), if any, out of the Gas Pool Account, etc.

15. The Committee notes that AS 9 defines ‘revenue’ as “the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them…”

16. On the basis of the above, the Committee is of the view that a company should recognise, the amount of consideration received/ receivable from the consumers on account of sale of its goods, as its revenue. The Committee notes that the company books the entire sale proceeds received from the ultimate consumers on account of sale of natural gas, which is inclusive of the amount to be contributed to ‘Gas Pool Account’ as its ‘sales’. The Committee is of the view that the company is correct in recording the entire sales proceeds as its revenue.

17. As far as inclusion of the amount of contribution to ‘Gas Pool Account’ in the purchase price of natural gas is concerned, the Committee notes paragraph 7 of Accounting Standard (AS) 2, ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, which states as follows:

“7. The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase.”

18. The Committee notes from the above that only the charges directly attributable to the acquisition of goods such as freight inwards, certain duties and taxes, etc., form part of the cost of purchase of goods. The contribution to the Gas Pool Account does not fall in any of the aforesaid categories. The Committee is, therefore, of the view that the contribution to the Gas Pool Account is not a direct charge attributable to the acquisition of natural gas. The Committee further notes that the contribution to ‘Gas Pool Account’ amounts to utilisation of sales proceeds collected from consumers, for the specified purposes as mentioned in paragraph 3 above and hence, should not be accounted for as a cost of purchase of the gas.

19. For the purpose of suggesting correct accounting treatment of contribution to ‘Gas Pool Account’, the Committee notes the definition
of the term ‘liability’, as provided by paragraph 10 of Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’ and paragraph 93 of the ‘Framework for the Preparation and Presentation of Financial Statements’, issued by the Institute of Chartered Accountants of India, which state as follows:

“A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.”

“93. Expenses are recognised in the statement of profit and loss when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase of liabilities or a decrease in assets (for example, the accrual of employees’ salaries or the depreciation of plant and machinery).” (Emphasis supplied by the Committee.)

20. On the basis of the above, the Committee is of the view that contribution to ‘Gas Pool Account’ is of the nature of present obligation giving rise to a liability for the company. Accordingly, it should be recognised as an expense in the profit and loss account, rather than as an item of cost of purchase.

21. The Committee does not express any opinion on the treatment of sales tax under the Sales Tax Act since the matter involves an interpretation of the Sales Tax Act and as per Rule 2 of the Advisory Service Rules of the Expert Advisory Committee, the Committee does not answer queries involving legal interpretation of various enactments.

D. Opinion

22. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 13 above:

(a) The present accounting treatment followed by the querist in respect of booking of gas pool contribution through purchases
is not correct.

(b) The correct accounting treatment of contribution to ‘Gas Pool Account’ would be to treat it separately as an expense by way of a charge to the profit and loss account.

(c) Deducting the gas pool contribution from sales/revenue on the face of the profit and loss account would not be in consonance with AS 9. The sales/revenue should be reflected at gross amount.

(d) The Committee does not express any opinion on this issue as stated in paragraph 21 above.

¹ Opinion finalised by the Committee on 25.1.2006