A Government Company engaged in the business of owning and running hotels and resorts. The company receives bookings for the hotel and resort rooms and related facilities from individuals, corporates and travel agents.
The company offers discounts to the guest discretionally, based on various factors. This strategy has given to the company an edge over its competitors and thereby helped the company to increase its turnover year on year.
Current Accounting treatment: The Company currently books revenue on the Gross Basis and expensed off the discount.
The company intends to disclose the revenue in the following manner on the face of the statement of profit and loss:
B. Query
The Company had sought the opinion that whether the above disclosure of the revenue would be in compliance with the disclosure required in AS 9.
C. Opinion
On the basis of the above, the opinion in respect of the query raised by the company:
In order to determine the accounting treatment of the discount(s) allowed, the nature of discount being allowed in the extant case needs to be determined.
For this purpose, the following definitions given in the Guidance Note on Terms Used in Financial Statements.
Cash Discount: A reduction granted by a supplier from the invoiced price in consideration of immediate payment or payment within a stipulated period.
Trade Discount: A reduction granted by a supplier from the list price of goods or services on business considerations other than for prompt payment.
In the extant case, the basic objective of providing discount is to use it as a marketing strategy thereby helping the company to increase its turnover year on year. Therefore, the nature of the discount being allowed by the company is that of a trade discount and as per AS-9 Trade discounts and volume rebates given should be deducted in determining revenue.
On the basis of above, that the proposed presentation of the company to present the revenue on gross basis and then to present the trade discount as deduction from the revenue is not correct and is not in accordance with the requirements of AS 9. The amount of the revenue to be presented in the Statement of Profit and Loss should be net of the discount.
The above opinion was by the ICAI-Expert Advisory Committee
