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A. Facts of the Case
1. A joint venture company is a ‘special purpose vehicle’
incorporated to implement the rail component of ‘City Urban
Transport Project’ (CUTP). The shareholders of the company are
Ministry of Railways (MoR) and a State Government (SG) in the
ratio of 51:49. The cost of the project is estimated to be Rs. 3,125
crore, which is sanctioned by the Government of India (GoI). The
cost of CUTP project is to be shared between the MoR and SG in
the ratio of 50:50. The implementation of the rail component
envisages a loan from the World Bank which is to be disbursed to
the MoR and the SG in the ratio of 50:50. However, the funds are
given to the company by way of annual budgetary support by the
MoR. The allocation of funds by the SG is through City Metropolitan
Region Development Authority (herein after referred to as XYZ
Authority). There are various works, which are to be executed
under CUTP. Executions of these works are divided among various
agencies, e.g., Western Railways, Central railways and XYZ
Authority. Some works are to be executed by the company itself.
For execution of the company’s works under CUTP, the company has entered into various agreements with the MoR, SG, Western
Railways, Central Railways and XYZ Authority. The funds received
from the MoR and SG are distributed to various agencies which
are executing the work on behalf of the company as per their
requirements. The company also spends funds on projects executed
directly by it. (The querist has furnished copies of various
documents for the perusal of the Committee.)
2. When the works are executed by the Western Railways or
Central Railways, either there is advance payment or
reimbursements are made by the company to these agencies. In
the case of work executed by XYZ Authority, no payments are
made, but credit for the amount of work executed by XYZ Authority
is given to the SG and adjusted against its share to the total cost
of CUTP as the SG has to bear 50% of the total cost of CUTP.
For the portion of CUTP works, which are directly executed by the
company, payments are made directly by the company to the
vendors and contractors as per the terms of the contract.
3. The querist has stated that as per a clause in the Memorandum
of Understanding (MoU) entered into with the MoR, assets created
under this project would be the property of Indian Railways and
not of the company. Hence, all the assets, which are created
under this project, could not be accounted for as fixed assets in
the books of the company.
4. As per the querist, the present accounting treatment followed
by the company is as follows:
For Receipt of funds for CUTP
At present, the company is accounting receipt of funds from
the MoR and the SG as ‘Funds received for CUTP’ under
‘Unsecured Funds for Projects’ just below Shareholders’ Funds.
For Payment of funds for CUTP
To execute CUTP work, amount is provided to agencies and
on periodical basis, expenditure statements are given by these
agencies to the company. All the CUTP expenditures incurred
by these agencies and the company are accounted as ‘CUTP Funds Utilised’ as a deduction from CUTP Funds received
under ‘Unsecured Funds for Projects’.
5. The querist has clarified that the company is a project executing
company and does not have any profit motive. The company is
exempt from the payment of income-tax under section 12A of the
Income-tax Act, 1961, and as a precondition for this exemption,
the dividend clause has been deleted with the prior approval of the
MoR and the SG. The company prepares income and expenditure
account instead of profit and loss account. To meet the
organisational expenses, the company has been authorised to
levy direction and general (D&G) charges to the extent of 1% to
5% on the cost of the works executed. Other than D&G charges,
there is no consideration flowing to the company. It also earns
interest income by placing short-term funds with banks. Both D&G
charges and interest income are used for meeting the organisational
set-up of the company.
B. Query
6. The querist has sought the opinion of the Expert Advisory
Committee on the following issues:
(i) Whether the accounting treatment given to receipt and
expenditure/payment of CUTP funds is correct.
(ii) Whether the works executed directly by the company
and/or through agencies can be shown as turnover or
value of work completed as per Part II of Schedule VI to
the Companies Act, 1956.
C. Points considered by the Committee
7. The Committee notes that the basic issue raised by the querist
relates to accounting for receipt of, and payment from CUTP funds,
by the company and presentation of works executed by the
company, directly or through other agencies. Hence, the Committee
has examined only this issue and has not examined any other
issue that may be contained in the Facts of the Case, such as, the
propriety of preparation of income and expenditure account instead
of profit and loss account, etc.
8. From the facts and circumstances of the case, it appears to
the Committee that there exists an agency relationship between
the company and the MoR and the SG, where the MoR and the
SG act as principals and other agencies like Western Railways
and Central Railways are responsible for execution of their portion
of the project. The company merely receives funds from MoR/SG
and disburses the same to the executing agencies and monitors
the progress of the project and consolidates information on
expenditure incurred for the project. However, considering the facts
and circumstances of the case, the Committee notes that two
other situations can also be contemplated in the present case,
viz., (i) the company is not acting as an agent and the economic
benefits or service potential of the assets created will flow to the
company, and (ii) the company is not acting as an agent and the
economic benefits or service potential of the assets created will
not flow to the company.
9. The Committee further notes that Part II of Schedule VI to the
Companies Act, 1956 requires disclosure of turnover in the profit
and loss account, while Part I of the said Schedule requires
presentation of fixed assets on the face of the balance sheet. The
Committee is of the view that accounting treatment should be
decided based on which of the above mentioned situations prevails.
The accounting treatment to be followed for each of the above
situations is explained in-principle in the paragraphs that follow.
10. The Committee is of the view that in the situation of agency
relationship as discussed above, the accounting treatment
mentioned in paragraph 4 above (i.e., accumulating the expenditure
as ‘CUTP Funds Utilised’ and showing the same as deduction
from ‘Funds received for CUTP in the balance sheet) as followed
by the company in respect of project-related expenditure is in
order. When expenses are not directly paid by the company to
XYZ Authority for work done by that agency but adjusted against
the share of cost of the project to be borne by the SG, ‘CUTP
Funds Utilised’ should be debited and ‘Funds received for CUTP’
should be credited (it being a case of constructive receipt of funds
and constructive payment for expenses). In respect of advances
given by the company to other executing agencies, the same may
be treated as ‘Advances disbursed’, which should also be shown as deduction from ‘Funds received for CUTP’. As and when
expenditure statements are received from those agencies and
accepted, the ‘Advances disbursed’ should be cleared by transfer
to ‘CUTP Funds Utilised’. However, consideration for the agency,
like D&G charges should be treated as revenue and expenses
incurred for that purpose (including establishment expenses) and
should be recognised in the income and expenditure account. In
this connection, the Committee notes that paragraph 4.1 of
Accounting Standard (AS) 9, ‘Revenue Recognition’, inter alia,
reads as below:
“In an agency relationship, the revenue is the amount of
commission and not the gross inflow of cash, receivables or
other consideration.”
The corresponding debit for the above revenue should be treated
as a receivable from the MoR/SG, which should be cleared by
transfer to ‘CUTP Funds Utilised’. The timing of this entry should
be on the lines explained in paragraph 13 below.
11. As regards the situation where the company is not acting as
an agent and the economic benefits or service potential of the
assets created will flow to the company, the Committee notes that
paragraphs 49 and 88 of the Framework for the Preparation and
Presentation of Financial Statements issued by the Institute of
Chartered Accountants of India give, respectively, the following
definition of, and recognition criteria for, an asset:
“An asset is a resource controlled by the enterprise as a
result of past events from which future economic benefits are
expected to flow to the enterprise.”
“An asset is recognised in the balance sheet when it is probable
that the future economic benefits associated with it will flow to
the enterprise and the asset has a cost or value that can be
measured reliably.”
The Committee also notes that Accounting Standard (AS) 10,
‘Accounting for Fixed Assets’, defines ‘fixed asset’ as follows:
“6.l Fixed asset is an asset held with the intention of being
used for the purpose of producing or providing goods or services and is not held for sale in the normal course of
business.”
12. From the above and having regard to the nature of the project
and the fact that the company is without profit motive, the
Committee is of the view that if the future economic benefits or
service potential associated with the assets created will flow to the
company, then, the company should recognise fixed assets in its
own books with a clear description that the company is not the
legal owner of the assets created. In this situation, the mere fact
that the legal title in respect of the assets created lies with the
Indian Railways does not affect recognition of fixed assets in the
books of the company. This is in consonance with the principle of
‘Substance over Form’ as explained in Accounting Standard (AS)
1, ‘Disclosure of Accounting Policies’. In this situation, until the
project is complete, project-related expenditure will be accumulated
as ‘capital work-in-progress’. This will also include advances given
to other executing agencies. When expenses are not directly paid
by the company to XYZ Authority for work done by that agency but
adjusted against share of cost of the project to be borne by the
SG, ‘capital work-in-progress’ should be debited and ‘Funds
received for CUTP’ should be credited (it being a case of
constructive receipt of funds and constructive payment for
expenses). The amount to be capitalised should be determined in
accordance with applicable accounting standards (for example,
AS 10). In this situation, funds received from the MoR/SG should
be shown as ‘Funds received for CUTP’ without any deduction
towards utilisation of the funds for assets created and recognised
as fixed assets by the company as these funds are of the nature
of capital contribution. However, disclosure of utilisation should be
made in the accounts. In this situation, there can also be revenue,
such as, D&G charges to be recognised in the income and
expenditure account. The corresponding debit for the revenue
should be treated as a receivable from the MoR/SG, which should
be cleared by debit to ‘CUTP Funds Utilised’. The timing of this
clearance entry should be on the lines explained in paragraph 13
below.
13. As regards the situation where the company is not acting as
an agent and the economic benefits or service potential of the assets created will not flow to the company, the Committee is of
the view that the company should recognise both project-related
expenses and turnover in respect of its own scope of work executed
directly and/or through other agencies in accordance with the
applicable accounting standards (for example, Accounting Standard
(AS) 7, ‘Construction Contracts’) in the income and expenditure
account. The corresponding debit for turnover will be a receivable
from the MoR/SG. To the extent the work is in progress, the
income and expenditure account should be credited as work-inprogress
with corresponding debit to work-in-progress (balance
sheet). The receivables mentioned above should be cleared by
debit to ‘CUTP Funds Utilised’. The timing of this entry should be
in accordance with the terms of award of work or the mutual
agreement, as the case may be. This may be at the time of
revenue recognition or at a subsequent point of time. In the absence
of terms of award of work or the mutual agreement (which will be
rare), the entry should be passed as soon as the receivables are
determined. When expenses are not directly paid by the company
to XYZ Authority for work done by that agency but adjusted against
the share of cost of the project to be borne by the SG, expenses
should be debited to income and expenditure account and ‘Funds
received for CUTP’ should be credited (it being a case of
constructive receipt of funds and constructive payment for
expenses). The credit to receivables towards the share of the SG
in the cost of CUTP by transfer to ‘CUTP Funds Utilised’ should
be done through a separate accounting entry at the appropriate
time as explained above. In this situation, advances given to other
executing agencies should be shown under ‘Current Assets, Loans
and Advances’ and as and when expenditure statements are
received from those agencies and accepted, the said advance
should be transferred to project-related expenses, to be recognised
in the income and expenditure account in accordance with the
applicable accounting standards. Further, in this situation, revenue
includes not only project expenses to be met out of Funds for
CUTP but also D&G charges.
14. The Committee notes that in all the above situations, there
may be other items of revenue which should be accounted for in
accordance with the applicable accounting standards. If the
corresponding receivables are due from the MoR/SG and are to be adjusted against the Funds for CUTP, the receivables should
be transferred to ‘CUTP Funds Utilised’ as explained in paragraph
13 above.
15. The Committee notes that section 211(1) of the Companies
Act,1956 requires the balance sheet to be prepared in accordance
with the form set out in Part I of Schedule VI, or as near thereto as
circumstances admit. The Committee is of the view that under all
the above situations, funds received for the project may be shown
separately as ‘Funds received for CUTP’ and for situations where
the company is acting as an agent, and where the company is not
acting as an agent and the economic benefits or service potential
of the assets created will not flow to the company, ‘CUTP Funds
Utilised’ may be shown as deduction from ‘Funds received for
CUTP’. As regards the heading under which the funds should be
exhibited in the balance sheet, in case the company is required to
repay the funds back to the MoR/SG (possibly out of any future
sources), the funds may be exhibited as a liability to be repaid
under ‘Loan Funds’. If there is no such requirement, the funds
should be exhibited within Shareholders’ Funds, after ‘Reserves
and Surplus’. In this connection, the Committee also notes that
there is only dividend prohibition clause and it appears that there
is no specific prohibition for repayment of funds received.
D. Opinion
16. On the basis of the above, the Committee is of the following
opinion on the issues raised in paragraph 6 above:
(i) Accounting treatment for expenditure/payment of CUTP
funds should be as explained in paragraphs 10 to 13
above depending on the situation. Funds received may
be presented as ‘Funds received for CUTP’ in all the
situations mentioned in paragraph 8 above, while ‘CUTP
Funds Utilised’ may be shown as deduction from ‘Funds
for CUTP’ in the situations where the company is acting
as an agent and the situation where the company is not
acting as an agent and the economic benefits or service
potential of the assets created will not flow to the
company. The heading under which the funds should be exhibited in the balance sheet will be as explained in
paragraph 15 above.
(ii) The works executed directly by the company and/or
through agencies (in respect of the company’s own
scope of work) should be shown as turnover as per
Part II of Schedule VI to the Companies Act, 1956 only
in the situation where the company is not acting as an
agent, and the economic benefits or service potential of
the assets created will not flow to the company as
explained in paragraph 13 above. Further, as explained
in paragraphs 10 to 14 above, there can be other items
of revenue also.
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