Accounts & Audit Daily

Dear Reader,

Welcome to Taxmann.com | Newsletter – Reporting the Facts with Taxmann’s Analysis. Today's Edition Brings to You the latest in Accounting Standards to developments in the Companies Act.

Rahul Limited (hereinafter referred to as "the Company") is a wholly-owned subsidiary of LG Limited, specializing in the business of sovereign crude oil. The Company operates as an agent for LG Limited in the purchase and sale of sovereign crude oil. Below is a summary of the procedures involved in these transactions:

Purchase of Sovereign Crude Oil: The Company acquires sovereign crude oil based on the instructions from LG Limited, having secured the necessary approvals. This crude oil is held by the Company in a custodial capacity. LG Limited provides the funds for these purchases, and the purchase invoice is issued in the Company's name. Any discrepancies in funding—whether excess or shortfall—are adjusted accordingly.

Sale of sovereign crude oil: The Company sells sovereign crude oil to Indian companies on behalf of LG Limited, issuing invoices under its own name. Each sale invoice clearly states that the Company is acting as a custodian for LG Limited. The proceeds from these sales, along with any applicable interest (net of TDS), are remitted back to LG Limited. The TDS deducted by the bank or buyer is reflected in the Company's Form 26AS. The Company claims this TDS through its income tax returns, and any refunds received are returned to LG Limited.

The management of the Company is seeking guidance from a consultant on the appropriate accounting treatment for the purchases and sales of sovereign crude oil in the Co company's financial statements.

Relevant Provision

Ind AS 115: Revenue from Contracts with Customers

Appendix B

Para B35: An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. However, an entity does not necessarily control a specified good if the entity obtains legal title to that good only momentarily before legal title is transferred to a customer. An entity that is a principal may satisfy its performance obligation to provide the specified good or service itself or it may engage another party (for example, a subcontractor) to satisfy some or all of the performance obligation on its behalf.

Para B35A: When another party is involved in providing goods or services to a customer, an entity that is a principal obtains control of any one of the following:

a) a good or another asset from the other party that it then transfers to the customer.

b) a right to a service to be performed by the other party, which gives the entity the ability to direct that party to provide the service to the customer on the entity's behalf.

c) a good or service from the other party that it then combines with other goods or services in providing the specified good or service to the customer. For example, if an entity provides a significant service of integrating goods or services (see paragraph 29(a)) provided by another party into the specified good or service for which the customer has contracted, the entity controls the specified good or service before that good or service is transferred to the customer. This is because the entity first obtains control of the inputs to the specified good or service (which includes goods or services from other parties) and directs their use to create the combined output that is the specified good or service.

Para B 35B: When (or as) an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred.

Para B36: An entity is an agent if the entity's performance obligation is to arrange for the provision of the specified good or service by another party. An entity that is an agent does not control the specified good or service provided by another party before that good or service is transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified goods or services to be provided by the other party. An entity's fee or commission might be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party.

Expert Advisory Committee

In a similar case, the EAC observed that under Ind AS 115, when another party is involved in supplying goods or services to the customer, the entity must first assess whether its promise constitutes a performance obligation to deliver the specified goods or services directly (indicating it is acting as a principal) or if it is merely facilitating the provision of those goods or services by the other party (indicating it is acting as an agent). Additionally, the entity must determine whether it controls each specified good or service before it is transferred to the customer. The committee highlighted that control of an asset refers to the ability to direct its use and obtain substantially all remaining benefits from it, including the ability to prevent other entities from directing its use and accessing its benefits.

Moreover, the EAC noted that in the case of the company's sale of sovereign crude oil to Indian companies on behalf of LG Limited, the company issues invoices in its own name while explicitly stating that it acts as a custodian for LG Limited. Given this context, the EAC concluded that the company does not control the crude oil before it is transferred to the buyer. Since it is clearly stated that the company is acting as an agent rather than as a principal, it is not required to recognize the sales in its financial statements. For similar reasons, since the company does not have control over the crude oil, the same cannotbe considered as an 'inventory' of the company and therefore, the company should not recognize purchases/ cost of goods sold in its Statement of Profit and Loss.

Conclusion

In accordance with the provision and EAC opinion, it is concluded that the company should not present the sale and purchase of crude oil as revenue or cost of goods sold in the Statement of Profit and Loss. However, in accordance with Ind AS 1, the Company must provide appropriate disclosures regarding the judgments made by management in applying the Company's accounting policies, particularly in relation to Ind AS 115. This includes detailing the nature of its performance obligations in arranging for the sale and purchase of crude oil, the impact of its relationship with LG Limited, and the transactions conducted on its behalf. Such disclosures will enable users of the financial statements to understand the effects of these transactions on the entity's financial position and performance.

That's it from us for today!

We're keen on enhancing Your Taxmann.com | Newsletter Experience and would greatly value your input. Your feedback is pivotal in guiding our improvements. Could you spare a few moments to share your thoughts in the comments on how we might better serve your needs?

Register Now for Taxmann's [Virtual] Masterclass on Business Valuation – Practical Approach | Case Studies | Templates

1 Speaker | 5 Sessions | 15 Hours | Weekend Classes

?? Starting from 8th November 2024 | ?? 4:00 PM to 7:00 PM (IST)

Fees: ? 9999/- (Taxes Extra)

?? Register Now! (Limited Slots Available): https://taxmann.social/boHY3

Faculty:

? CA. Vikash Goel – Head | Omnifin Group

He is a seasoned expert in Valuation and Talent Management. With impressive qualifications, including a Chartered Accountancy (CA), a Chartered Financial Analyst (CFA) from India, an MS in Finance, and an MBA, Vikash is a distinguished alumnus of the Indian Institute of Management, Calcutta. He is an accomplished author, having penned multiple books focusing on the intricacies of valuation.

Key Learnings:

?? Basics of Business Valuation

?? Understanding Business Valuation Models & their Applications

?? Overview of Valuation Methods – Income, Cost, & Market Approaches

?? Business Valuation for Startups

?? Business Valuation in Mergers & Acquisitions

?? Valuing Complex Securities – Bonds & ESOPs

?? Case Studies

Benefits to Participants:

?? Get Replies to your Queries

?? Opportunity to Consult with the Speaker

?? Complimentary Access to the Accounts & Audit Module of Taxmann.com | Research for One Month

?? Complimentary Copy of Taxmann's Valuation of Business, Securities & Financial Assets Authored by CA. Vikash Goel

?? Access Excel Templates for Valuation

?? Earn a Certificate of Participation

?? Relevant For:

? Chartered Accountants

? Cost Accountants

? CA Students

? Accountants

? Entrepreneurs & Startup Founders

? MBA Professionals