Reversal of Consultancy Fees

Facts of the case:

A public sector undertaking is engaged in rendering comprehensive consultancy services it in the field of Healthcare. The company has devised its accounting policy, in which 70% of the consultancy fees are accounted for at the time of placement of orders with the suppliers and balance 30% on completion of supplies.

The company placed orders for and on behalf of the Ministry of Health & Family Welfare amounting to Rs.18,15,84,000 for which the specified consultancy fee was 2%. Against the said orders, the company booked 70% of the specified consultancy fee on placement of orders on the full amount. However, against the said order, amount booked for supplies was 7,05,97,989/ as it was suspended due to inferior quality and matter was under arbitration. The Company booked remaining 30% of consultancy on reduced amount (7,05,97,989/).

The Comptroller and Auditor General of India (C&AG) has raised the following issues on non-reversal of consultancy fee of Rs.16.17 lakh, which was booked at the time of placement of order at the rate of 2% of 70% of the unexecuted value of Rs.11,55,06,100/. Non-reversal of the same has resulted in overstatement of ‘Advances’ under ‘Current Assets.

The querist has also stated that this matter is sub-judice and is pending in the Court of Arbitration. Therefore, to add or reduce on this account will be wrong on the part of the company.

Query:

The querist has sought the opinion of the Expert Advisory Committee as to whether the action of the company in this regard is correct and has specifically raised the following issue:

• When the services are rendered, but due to certain reasons which are beyond the control of the company, the supplies of goods have been suspended/cancelled, whether the company is entitled for fees to the extent it has completed its activities.
• Is it advisable to change the financial statements when the matter is sub-judice?

Conclusion:

The EAC notes the fact of the case and Paragraph 9 of AS 9 and is of the view:-

• When the company has rendered the services and performed its duties, the revenue is earned in respect of services performed and the same should be recognised in the books of the company provided the conditions for recognition of revenue as per the provisions of AS 9 have been fulfilled. However, if subsequent to recognition of revenue, certain uncertainties arise in respect of the measurability and collection of revenue, a separate provision to the extent of uncertainties should be made.
• When the revenue earlier booked has been recognised keeping in view the provisions of AS 9, a separate provision is more appropriate rather than changing the financial statements. Change in the financial statements is appropriate only when it is required by any Accounting Standard or the generally accepted accounting principles and is not dependent merely on the fact that the matter is sub-judice.