A. Facts of the Case
1. A public sector undertaking is engaged in rendering
comprehensive consultancy services in the field of hospital planning,
design, detail engineering, quality control, project management
and monitoring as well as procurement, supply, installation and
commissioning of medical equipments for the projects assigned to
it by the Ministry of Health & Family Welfare, Ministry of External
Affairs, private and public sector organisations as well as various
state governments. Being a consultant, the company’s main
activities in procurement projects are as under:
(i) To prepare tender documents.
(ii) Advertisement in newspaper for inviting tenders.
(iii) Selling of tenders.
(iv) Receipt of tenders and technical evaluation of the bids.
(v) Opening of price bids.
(vi) Final evaluation of bids.
(vii) Approval of clients.
(viii) Placement of orders.
(ix) Follow-up for supplies.
(x) Release of payments to suppliers.
(xi) Rendering of account to the client.
2. The querist has stated that based on the above activities
undertaken by the company, the company has devised its
accounting policy, in which 70% of the consultancy fees is
accounted for at the time of placement of orders on suppliers, i.e.,
on completion of activities (i) to (viii) above and balance 30% on
completion of supplies, i.e., activities (ix) to (xi) above.
3. The querist has informed that in one of the projects, the
company placed orders for and on behalf of the Ministry of Health
& Family Welfare, amounting to Rs.18,15,84,000/- for which the
specified consultancy fee was 2%. Against the said orders, the
company booked 70% of the specified consultancy fee on
placement of orders. However, against the above orders, the
amount booked for supplies made is Rs.7,05,97,989/-, as the
supplies against the said orders are suspended due to inferior
quality of material and the matter is under arbitration. Accordingly,
the company booked the remaining 30% of consultancy fees only
on Rs.7,05,97,989/- on completion of supplies.
4. According to the querist, the Comptroller and Auditor General
of India (C&AG) has raised the following issues on non-reversal of
consultancy fee of Rs.16.17 lakh, which was booked at the time of
placement of order at the rate of 2% of 70% of the unexecuted
value of Rs.11,55,06,100/-:
“Order for purchase of 10 lakh bed nets for National Anti-
Malaria Programme was placed by the company during 2000-
01 at an estimated cost of Rs.18,15,84,000/-, against which
the company has booked purchases amounting to
Rs.7,05,97,989/- when the procurement was suspended due
to inferior quality of nets. The Ministry of Health & Family
Welfare has rejected all the nets and has withheld the payment
to the company. The case is pending in arbitration.
It was observed that the company has booked consultancy
fee of Rs.26,69,285/- @ 2% of 70% of ordered amount at the
time of issue of purchase order and Rs.4,44,768/- @ 2% of
30% on Rs.7,05,97,989/- after receipt of nets as per accounting
policy no. 4A(b)(ii). As the goods supplied were only for
Rs.7,05,97,989/-, the consultancy fee of Rs.23,10,122/- booked
@ 2% of 70% on the unexecuted value of Rs.11,55,06,100/-
should have been reversed. Non-reversal of the same has
resulted in
overstatement of ‘Advances’ under ‘Current Assets’ (NAMP
A/c) by Rs.23,10,122/-.”
5. In response to the C&AG comments, the company has replied
that the consultancy fee in respect of bed nets supplies has been
correctly booked as per the accounting policy of the company. As
per the accounting policy of the company, 70% fee is due on
placement of supply order which has accordingly been booked
and the balance of 30% fees has been booked in proportion of
supplies which are accounted for in the books of account. Since
the supplies have not been accepted in full, the balance fees of
30% has not been accounted for on the unaccounted amount of
supplies. Moreover, the case is under arbitration and as such, the
question of reversal of fees does not arise until the award of
arbitration. Further, as per the accounting policy, where there is a
revision in the cost of the project, the consultancy income is
reflected in the accounting year in which this fact is known, and as
such, the necessary adjustment required, if any, will be made in
the year of final arbitration award. Accordingly, the consultancy
fees has correctly been accounted for as per the company.
6. The querist has also stated that this matter is sub-judice since
2001 and is pending in the Court of Arbitration. Therefore, to add
or reduce on this account will be wrong on the part of the company.
Also, as per the accounting policy of the company, which lays
down that where there is revision in the cost of the project, the
consultancy income is reflected in the accounting year in which
this fact is known, as the necessary adjustment required, if any,
will be made in the year of the final arbitration award. The C&AG
auditors have asked to reverse the total fees on unsupplied portion
of supplies, whereas the company’s contention is that it has
performed its duties and accordingly, booked its fees on the basis
of activities performed, which is in line with its accounting policy.
The company has also proposed to approach the Institute of
Chartered Accountants of India (ICAI) and assured that necessary
adjustment required, if any, will be made after receipt of the expert
opinion in this regard from the ICAI.
B. Query
7. The querist has sought the opinion of the Expert Advisory
Committee as to whether the action of the company in this regard
is correct and has specifically raised the following issues:
(i) When the services are rendered, but due to certain
reasons which are beyond the control of the company,
the supplies of goods have been suspended/cancelled,
whether the company is entitled for fees to the extent it
has completed its activities.
(ii) Is it advisable to change the financial statements when
the matter is sub-judice?
C. Points considered by the Committee
8. The Committee notes that the basic issue raised in the query
relates to reversal of consultancy fees already recognised at the
time of placement of orders, against which supplies have not been
accepted by the clients due to inferior quality of materials. The
Committee has, therefore, considered only this issue and has not
touched upon any other issue arising from the Facts of the Case,
such as, the accounting policy of the company to recognise
consultancy fees to the extent of 70% at the time of placement of
orders and the balance at the time of supplies made against the
order; booking of sales and purchases, if any, by the company;
whether or not the company is legally entitled for the fees which is
sub-judice; etc.
9. The Committee notes from the Facts of the Case that the
amounts in respect of unexecuted value of order, consultancy fees
recognised in respect thereof and other figures as stated by the
C&AG in their comments do not match with the figures calculated
in accordance with the amounts/percentages mentioned by the
querist. The Committee is, therefore, not commenting upon the
calculations of various figures and is focusing its opinion on the
accounting treatment made in respect of those figures. Further, it
is not clear whether the company is recognising the remaining
30% of consultancy fees on supply of the orders made or on
acceptance of the same by the clients as the querist has used
unexecuted/unaccounted/unsupplied terms for that portion of
supplies interchangeably.
10. The Committee also notes the following paragraphs of
Accounting Standard (AS) 9, ‘Revenue Recognition’, issued by the
Institute of Chartered Accountants of India:
“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.
9.3 When the uncertainty relating to collectability arises
subsequent to the time of sale or the rendering of the service,
it is more appropriate to make a separate provision to reflect
the uncertainty rather than to adjust the amount of revenue
originally recorded.”
Thus, in the view of the Committee, if at the time of booking of
revenue, revenue is not measurable or it is unreasonable to expect
ultimate collection thereof, revenue recognition should be postponed
to the extent of non-measurability and uncertainty as to collection.
Since in the present case, the company has recognised 70% of its
revenue at the time of placement of orders, presuming that at the
time of booking of such revenue, the revenue was measurable
and it was not unreasonable to expect ultimate collection, the
Committee is of the view that since the uncertainty with regard to
collection of revenue has arisen subsequent to the recognition of
revenue, a separate provision to the extent of uncertainty should
be made rather than to reverse the revenue already recognised in
accordance with the provisions of AS 9. Thus, in the present case,
the company should make a separate provision to the extent the
collectability of revenue is uncertain.
D. Opinion
11. On the basis of the above, the Committee is of the
following opinion on the issues raised by the querist in paragraph
7 above:
(i) When the company has rendered the services and
performed its duties, the revenue is earned in respect of
services performed and the same should be recognised
in the books of the company provided the conditions for
recognition of revenue as per the provisions of AS 9
have been fulfilled. However, if subsequent to recognition
of revenue, certain uncertainties arise in respect of the
measurability and collection of revenue, a separate
provision to the extent of uncertainties should be made,
as discussed in paragraph 10 above.
(ii) When the revenue earlier booked has been recognised
keeping in view the provisions of AS 9, a separate
provision is more appropriate rather than changing the
financial statements. Change in the financial statements
is appropriate only when it is required by any Accounting
Standard or the generally accepted accounting principles
and is not dependent merely on the fact that the matter
is sub-judice.
1 Opinion finalised by the Committee on 14.5.2007. |