1.19     Query

Disclosure of “Amounts Billed to Clients” and “Work-in-Progress”.

 1. A Government of India company is mainly executing turnkey projects including jobs of civil works, erection and commissioning of coal and material handling plants, sugar projects, etc. The projects undertaken are spread over a number of years.

2. The accounting procedure followed by the company is as follows:

(i) As and when the running bills are raised on the clients, the clients accounts are debited and the corresponding credit is given to “Amount Billed to Clients A/c”, which is not an income head. The monies received from the clients are credited to their account and thus the amount shown as debtors goes down.

 

(ii) The amount to be credited to income is derived from the evaluation of work-in-progress. The method of evaluation is described in the notes forming part of the accounts. The relevant note is reproduced below:

“Accounting for valuation of work-in-progress:

(i) Work-in-progress has been valued by taking actual costs incurred plus profit allocated on “Percentage of Completion Method” which is as follows:

 Estimated profit of each project has been worked out after taking into account the latest estimated costs, based on actuals plus commitments plus cost estimates for commitments yet to be made.

(ii) In respect of projects where loss is anticipated, work-in-progress has been valued after making adjustments for proportionate loss. 

 

(iii) The additions to work-in-progress are credited as value of work done for the year and taken to income. 

 

(iv) In view of the turnkey nature of contracts, the gross value of ‘amount billed to clients’ is carried forward and shown separately under liabilities till the projects are closed for accounting proposes. On closure of a project, the value of work-in-progress of corresponding project is set off against such credits”. Work-in-progress, i.e., value of work done for the year, connotes the debit, the corresponding credit being given to the income head “work done for the year.”

 

(iii) In view of the turnkey nature of the contracts, the gross value of amount billed to clients is carried forward and on completion of the project it is set-off against the value of work-in-progress. On completion of any project, the ‘Amount Billed to Clients A/c’ and ‘Work-in-Progress Account’ become equal. 

 

 (iv) The credit head “Amount Billed to Clients” is neither a present nor a future liability and correspondingly the work-in-progress denotes aggregated value of work done but is not an asset of the company. 

 

 (v) In past, i.e., upto 31-3-85, the company was exhibiting the “Amount Billed to Clients” under the head “Current Liabilities” and “Work-in-Progress” was exhibited under the head “Current Assets, Loans and Advances”. By exhibiting these two items under current liabilities and current assets, the company was of the view that the current ratio was not being indicated correctly. In view of this, the company in 1985-86 changed its policy and exhibited the “Amount Billed to Clients” under liabilities distinctly with a separate heading after the ‘Loan Funds’ (1985-86 Balance Sheet-Liabilities side). Similarly, the “Work-in-Progress” is shown distinctly under “Application of Funds” after ‘Fixed Assets’. As the company has changed its policy, the fact was mentioned in “Notes forming part of the Accounts”. The present joint statutory auditors have also concurred with the view of the company, explained above.

3.The Member Audit Board and Ex-officio Director of Commercial Audit was of the opinion that the two heads of accounts cannot be shown separately under ‘Liabilities’ and under ‘Application of funds’ as there is no provision in Schedule VI to the Companies Act, 1956 for such an exhibition. The company, in its reply, stated that as per section 211(1) of the Companies Act, 1956, the balance sheet is required to be drawn in the form set out in Part I of Schedule VI or as nearer thereto as circumstances admit. The member Audit Board, Ex-officio Director of Commercial Audit, however, has not accepted the view of the company.

4. The Querist has sought the opinion of the Expert Advisory Committee as to whether the method of accounting followed by the company is correct or not.

                                                                                             Opinion                       July 29, 1987

1.The Committee notes that the method of accounting followed by the company gives rise to a notional liability for ‘Amount Billed to Clients A/c’. Progress payments received from clients are deducted from the clients’ accounts which are shown at the amount billed to them and shown as sundry debtors.

2.The Committee notes that the Institute of Chartered Accountants of India has issued Accounting Standard 7 (AS-7) on ‘Accounting for Construction Contracts’. AS-7 recognises that in case of construction contracts, including the turnkey type of contracts, revenue can be recognised on percentage of completion method, subject to certain conditions laid down in the Standard. The Committee presumes that the company has fulfilled those conditions in adopting the percentage of completion method.

3.The Committee further notes that para 15 of AS-7 recommends as below:

                      “15. Progress Payments, Advances and Retentions

15.1 Progress payments and advances received from customers in respect of construction contracts in relation to the work performed thereon are disclosed in financial statements either as a liability or shown as a deduction from the amount of contract work-in-progress.

15.2 In case progress payments and advances received from customers in respect of construction contracts are not in relation to work performed thereon, these are shown as a liability.

15.3 Amount retained by customers until the satisfaction of conditions specified in the contract for release of such amounts are either recognised in financial statements as receivables or alternatively indicated by way of a note.”

4.On the basis of the above, the opinion of the Committee is as follows:

(i) The revenue should be recognised in respect of the value of work accomplished on the contracts by evaluating the work-in-progress.

 

(ii) Work-in-progress should be shown under the head ‘Current Assets’ and valued at cost incurred on the contract plus profit taken thereon in accordance with the formulae followed by the company, less cash received from the clients (progress payments). Alternatively, progress payments can be shown under the head ‘Current Liabilities’.

 

(iii) In view of the above, ‘Amount billed to clients A/c’ and the ‘Clients A/c’ will not appear anywhere on the ‘Liabilities’ and the ‘Assets’ side of the balance sheet.

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