BACKGROUND
The determination of transaction price is a critical step while Accounting for Revenue under Ind AS 115,
Revenue from Contracts with Customers. An entity needs to consider multiple factors while determining the transaction price of a contract, for example, the inclusion of a variable consideration, a financing component, etc. In this context, recently, the Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI) reviewed on the accounting for Delayed Payment Charges (DPC) collected by a company from its customers.
Facts of the Case
Company A (the Company) is engaged in the business of distribution of electric power to consumers. While harging tariff to its consumers, the company also collects DPC in case the consumers pay the tariff post the due date. The DPC is charged as per the tariff order of the State Electricity Regulatory Commission (SERC) Regulations.
The management of the Company believes that DPC is in the nature of penalty and is charged to customers in the normal course of business. The Company construes it in the nature of operating activities as it has a direct nexus with the State Electricity Regulatory Commission (SERC) Tariff order Regulations. It accounts for DPC in the year of its realisation, as ‘Income from other operating activity’ under Revenue from Operations and ‘Cash flows from operating activities’ in the statement of cash flows.
Query
Whether Delayed Payment Charges would be presented and disclosed as a variable consideration (Revenu e from Operation) or as a significant financial component (Other Income) in the contract?
EAC Response
Presentation of DPC in the statement of profit and loss
In the current case, the terms for late payment from the due date of payment are expressly provided in the tariff schedule, which is binding on both the buyer as well as the Company. Further, the DPC is defined in terms of percentage per annum which indicates that the same is directly linked with the passage of time and the quantum of the same depends on the timing of payment by the customers. Thus, the amount of consideration varies due to difference in timing of payments (the consideration will increase with increase in timing of payment). Therefore, considering the requirements of Ind AS 115, EAC was of the view that the DPC was of the nature of financing component and if such component is significant at the contract level, considering the facts and circumstances of the Company and specific requirements of Ind AS 115, the Company should not consider the same as part of its transaction price and revenue, and the same cannot be considered as ‘Other Operating Revenue’ under the head ‘Revenue from Operations’ in the Statement of Profit and Loss; rather the same should be presented as ‘other income’ in the Statement of Profit and Loss.
However, in a practical situation, if the Company expects, at contract inception, that the period between when it transfers the promised good or service to a customer and when the customer pays for that good or service will be one year or less, it need not make adjustments for the effects of significant financing component while recognising revenue.
