The Hindu Business Line : Accounting for disappearing coins at unmanned public telephones

EAC or the Expert Advisory Committee is a font of wisdom that lies hidden in an otherwise bureaucratic accounting regulatory body. Serious professionals know that the opinions of this group get published as volumes of `compendium' from time to time, and an occasional one gets published in the CA Journal, space permitting. Therefore, it should come as bonanza that 25 `recent opinions' are posted on www.icai.org.

The first one is about `revenue from unmanned Public Call Offices (PCOs)'. Facts of the case make an interesting reading: "A public sector company has installed unmanned PCOs at public places for providing telephone services to public. Any person can make a local call by dialling the wanted number from a PCO after inserting a one-rupee coin in the coin box fitted with the instrument."

That may sound pretty routine, but here is where the accounting problem starts: "The actual collection from unmanned PCOs is booked as revenue in the accounts of the company, i.e., such revenue is accounted for on cash basis."

The company's accounting policy notes, "The accounts are prepared under the historical cost convention adopting the accrual method of accounting except income from unmanned PCOs, which are accounted for on cash basis."

If you're wondering why accrual basis is given a go-by, the company explains that the exchange records of total calls generated by the PCO do not tally with the actual amount collected. Why so? Because of "misuse by the callers, test calls and misappropriation". It is impossible to trace the miscreants, frets the company, and when it comes to record-keeping, "the whole amount of metered calls is not taken into consideration and only actual collection for the year is booked as revenue in the books of account of the company". Which is what is mentioned in the accounting policy, you'd agree.

Would it make any difference if the company were to follow the bill? Yes; "in case the company considers revenue from unmanned PCOs for the financial year 2002-03 on the basis of metered calls instead of cash basis, this would result in overstatement of revenue by Rs. 93,85,457." Wow, that's almost a crore! Yet, it is only 0.015 per cent of the total revenue of the company for the financial year 2002-03, the query points out.

The company's justification for following the cash method is that in the alternative, the difference would have to be written off after "a lengthy and time consuming procedure" as there is no possibility of recovery of any dues. The query before the EAC is "whether the company is justified in booking actual collections from unmanned PCOs as its revenue".

The Committee takes the call

This was no wrong call for the EAC and so the Committee went into the question and studied Accounting Standard (AS) 9 on `Revenue Recognition'. The company renders service, and to recognise revenue from rendering of services, you have to see paragraphs 9.2, 10 and 12, reasoned the EAC. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim (as for example, in the case of escalation of price, export incentives, interest and so on) revenue recognition is postponed to the extent of uncertainty involved, states 9.2.

"In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made." On the contrary, when there is no uncertainty as to ultimate collection, recognise revenue at the time of sale or rendering of service even though payments are made by instalments, mandates that paragraph.

If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed, states paragraph 10. And para 12 is about measuring performance either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. "Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service." This para forms the crux of the EAC's opinion, as we would see presently.

The EAC dissected the transaction and observed that the company rendered the service when a customer made a call. Thus, as per AS-9, revenue is earned as soon as a call is made, said the EAC; "however, on the balance sheet date, in respect of certain calls, the amount is not expected to be received because of the reasons specified by the querist." Revenue should not be recognised to the extent it is expected, on the basis of the past experience, that cash will not be received on account of such calls, opined the EAC. And, to those who find the two negatives tough to decipher, the Committee said, "In other words, revenue should be recognised to the extent expected to be realised."

Accordingly, it would not be appropriate to postpone recognition of the entire amount of revenue from unmanned PCOs until cash is actually collected, said the EAC, applying the logic of para 12.

Reality adjustment

To help the company tackle its main problem of collections being short, there is paragraph 13 of AS-4 on `Contingencies and Events Occurring after the Balance Sheet Date'. It says that assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance-sheet date. Thus, when the company estimates its revenue `on the basis of past experience' and cash actually received (after the balance-sheet date but before the finalisation of the accounts) is less, "the amount of the revenue so estimated and the relevant asset should be adjusted on the basis of the actual collections," advised the EAC.

An escape route, however, is provided by the materiality factor. The Committee pointed out that Accounting Standards apply only to material items. So, "if the amounts are not considered material keeping in view not only the amount of total revenue but also the amount of profit/loss and so on, the revenue in respect of unmanned PCOs may be recognised on the basis of receipt of cash on the ground of materiality." In which case, plug in a suitable accounting policy, the EAC guided and supplied a draft paragraph: "The accounts are prepared under the historical cost convention adopting the accrual basis of accounting. However, revenue from unmanned PCOs is recognised on receipt of cash on the ground of materiality."

The last paragraph of the opinion sums up the EAC's view in three points: One, recognition of revenue on receipt basis is not justified for reasons stated by the company. Two, revenue should be recognised on the balance-sheet date to the extent it is expected to be realised. And three, in case the amounts are not considered material, revenue may be recognised on the basis of receipt of cash.

Well, that's some accounting for disappearing coins at unmanned public telephones. Hope you catch up with the other 24 opinions at the site before they disappear from there!

RFID feed

A RECENT report from the US Government Accountability Office (www.gao.gov) is on information security — more specifically, Radio Frequency Identification (RFID) technology. If you don't know what the thing is about and were afraid to ask your IT friends, the GAO document may have the answers for your questions. For, the 41-page `pdf' begins thus: "The main technology components of an RFID system are a tag, reader, and database. A reader scans the tag for data and sends the information to a database, which stores the data contained on the tag." To explain, there are diagrams.

RFID technology uses wireless communication in radio frequency bands to transmit data from tags to readers, informs a section of the report on `background'. "A tag can be attached to or embedded in an object to be identified, such as a product, case, or pallet. A reader scans the tag for data and sends the information to a database, which stores the data contained on the tag."

Where did the technology originate? You'd learn that it began during World War II. "During the war, radio waves were used to determine whether approaching planes belonged to allies or enemies." On how technology moves from defence to commercial use, here is an example. "Los Alamos National Laboratory developed a system to track nuclear materials by placing a tag in a truck and readers at the gates of secure facilities," and the same method allows tags to be placed on car windshields "so that toll systems can quickly identify and collect toll payments on roadways."

The use of tags and databases raises important security considerations related to the confidentiality, integrity, and availability of the data on the tags, in the databases, and in how this information is being protected, states the GAO. Key privacy concerns include tracking an individual's movements and profiling an individual's habits, among others, it notes. Don't be surprised that the Department of Homeland Security is using RFID "to track and identify assets, weapons, and baggage on flights". Before you know, there may be RFID tracking of whether you're attending the CPE programmes!

AccountSpeak@TheHindu.co.in

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