A. Facts of the Case
A company had undertaken various metro projects for other states on cost plus basis named as “External Projects”. In terms of contract agreement, the company was entitled to fixed percentage of fees on cost plus basis. Two types of advances were received by the Company and deposited in separate bank account
(i) advance against project cost (Advance I- As per contractual provisions, interest earned on this advance is payable to the concerned metro project agency) and (ii) advance received against fee for execution of
projects (Advance II-there is no contractual provision to refund the Interest).
On the basis of invoices which are raised for the work done the turnover is booked and advance from client both on account of project fund and fee is reduced to that extent. Remaining amount of advance fee continues to be shown under the head of account ‘Advance Received from Client’. However, interest earned during the year on fee received in advance booked as income of the company as there is no obligation on the company, to refund of interest income earned on it.
Observation raised by Resident Audit Party of C&AG that recognition of income on amount which has been shown as a liability is not correct as income cannot arise from a liability.
B. Query
The company has sought the opinion on the following issues arising from the above:
(i) Whether the company’s accounting treatment to recognize interest earned on advance fee as its income is correct as per the provisions of Ind AS 18?
C. Opinion
On the basis of the above, the opinion in respect of the issues raised by the company:
(a) As per the Ind AS 18, Revenue arising from the use by others of entity’s assets yielding interest shall be
recognized when it is probable that the economic benefits associated with the transaction will flow to the
entity and the amount of revenue can be measured reliably.
(b) In the extant case, it is probable that the interest income will flow to the entity and the same can be measured reliably. Therefore, the same should be recognized as revenue of the entity.
The above opinion was affirmed by the ICAI-Expert Advisory Committee.
