ICAI issues guidance note on accounting by e-commerce entities

K.R. Srivats New Delhi | Updated on March 06, 2021

Clears the air on the accounting treatment of unique aspects of e-commerce biz model

E-commerce entities will now have better guidance on various aspects of revenue and expense recognition for transactions conducted online. The CA Institute has now come up with a 'guidance note' on accounting by e-commerce entities, sources said.

E-commerce is the activity of electronically buying or selling products or other services over the internet. This business model lets the firms and individuals conduct business over electronic networks, such as the internet.

The new Guidance Note is the first comprehensive one guiding various accounting issues unique to e-commerce. A guidance note is mandatory for the members of the CA Institute.

Several years back, the Institute of Chartered Accountants of India (ICAI) had come up with a Guidance Note on dot com companies. This, however, did not cover the accounting issues around unique aspects of e-commerce, which has seen quantum growth only in the recent decade.

India’s e-commerce market is expected to grow to $ 200 billion by 2026 from $ 38.5 billion as of 2017, a recent report had projected.

E-commerce companies had reported sales worth $ 4.1 billion across platforms in the festive week of October 2020, driven by smartphones.

In India, 100 per cent FDI is allowed in B2B e-commerce. Also, 100 per cent FDI under the automatic route is permitted in the marketplace model of e-commerce.

The latest ICAI guidance note throws light on revenue recognition on either ‘gross’ or ‘net basis’. This is critical as e-commerce companies’ valuation are linked to the revenues accounted for in their books. Also, the Guidance Note has covered aspects like ‘Right of Return’ against goods or services or coupons, giving the right to the customers to exchange the goods or services sold against other goods/services. It also deals with revenue recognition aspects around advertising services, web hosting services etc.

Accounting aspects on financing extended by certain e-commerce entities to customers —for example, ‘buy now, pay later’ scheme or an extended EMI payment scheme have also been covered in the Guidance Note.

Since many e-tailers sell their products through resellers or consignment agents, the guidance note has elaborated on this front’s revenue recognition aspects. In consignment arrangements, the risk and rewards of ownership do not get transferred. In this, a buyer (a dealer or distributor) takes physical possession of the goods but does not assume all the risks and rewards.

Published on March 06, 2021

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