Growth of e-commerce has revolutionized the way of conducting the business. The buyer and the sellers are the mere click of the mouse away. The Indian e-commerce industry has been an upward growth trajectory and is expected to surpass the US to become 2nd largest e-commerce market in the world 2034. Increasing internet and Smartphone penetration e-commerce revenue in 2016 US$ 30 billion will jump to US$ 120 billion in 2020. Blue chip PE firms looking for opportunities in the sector. Funding by Soft Bank US$ 2500 million to Flipkart in October 2017 is the biggest funding in India in 2017. Government initiatives like Start up India, recently 100% FDI by automatic route, Digital India as well as rising internet penetration driven by market players like Reliance Jio (4G) What to follow Ind AS or AS.
What to follow historical accounting rules or alternative rules? Will it apply all over the world on e-commerce transaction? Recognize at fair value or cost? Whether to follow legal approach or substance over the form for accountability of financial data? Will we can reduce complexity and increase transparency.
E-commerce
It is 'Disruptive' innovation. It is the buying and selling of goods and services or the transmitting of funds or data, over an electronic network, primarily internet Examples are Etail and Market place, Online Advertising, Over The Top, Cloud, Digital Payments etc.
Types of E-commerce transactions:-
- B2B - Business-to-Business: Power2SME (Top Player in B2B)
- B2C - Business-to-Consumer: Uber Launched UberEat
- C2C - Consumer-to-Consumer Ebay (Auction Site)
- C2B - Consumer-to-Business: Priceline.com (Price your own)
Key accounting issues from perspective of E-commerce business in elements of financial statement wise:-
Income (Revenue):-
Applicability of AS-9 or Ind AS-18 or Ind AS-115
AS-9 (Revenue Recognition):
Revenue : Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities from the sales of goods, rendering of services and from the use by others of enterprises resources yielding interest, royalties and dividends.
Revenue Recognition:-
Goods : Revenue should be recognize when all significant risk and reward has been transferred, measured reliably and ultimate collection is certain.
Service : Revenue from service transaction is recognized as the service is performed either by proportionate completion method or completed service contract and no significant uncertainty exist regarding consideration.
Ind AS 115 (Revenue from contracts with customers)
It is a comprehensive standard with 5 steps for revenue recognition are:-
- Identify the contract with customer.
- Identify the performance obligation.
- Determine the transaction price.
- Allocate the transaction price to performance obligation.
- Recognize revenue when entity satisfies performance obligation.
Multiple element contracts: prescribes that the transaction price in such arrangements must be allocated to each separate performance obligation on the basis of fair value, so that revenue is recorded at the right time and at right amount.
Main source of revenue:
Membership and subscription:
In order to avail of the services provided by websites, consumers are usually required to pay an amount as membership fees or subscription. Such membership fee or subscription may also be collected in the form of registration fee. While some services are available to members free of cost after registration, other services may be made available only on payment of additional fees. Revenue earning process is completed by performance by performance of specified actions as per the terms of arrangement, not simply by originating a revenue generating arrangement.
The membership/registration fees received by ecommerce organization may fall in the following categories and accounting treatment of the same:
- Non-refundable fees that entitle a member to use the service of the website by making payment for all services separately; It is an initial membership fee in nature of entrance should be capitalized and payment for service be recognize as per AS 9 or Ind AS 18/115.
- Non-refundable fees that entitle a member to use the services of the website indefinitely without making any further payment for use of services; It is in nature of upfront fee and continuing performance obligation so its recognition should be deferred and same should be recognize systematically over the period(s) during which fees are earned. For indefinitely providing service allocation of fees not less than 5 years (time basis) or any other basis usage basis which ever is more representative of the service render.
- Non-refundable fees that entitle a member to use the services of the website for specified period of time; Fees should be recognize on time basis over the specified period unless another systematic and rational basis is more representative ie usage basis.
- Fees that are refundable subject to fulfillment of certain conditions stipulated in subscription agreement. Usually contractual stipulations require such conditions to be fulfilled with a specified time period; Revenue should be recognizing when it becomes reasonably certain that conditions would be fulfilled. Amount should be credited and retained in liability account as 'customer refundable fees account'.
- Periodic membership/subscription fees on monthly, quarterly, annually or such other basis. Recognize as per accrual accounting.
Merchandising Activity:
It consist of two model are first Market place model(zero inventory) e.g. Naptol, ebay and Shopclues record revenue on net basis(ie commission) and second is Inventory model e.g. Jabong, Latestone.com recognize revenue gross basis (ie revenue and cost).
Sub points to merchandising activity:
- Auction:- C2C model, e.g. Ebay which host auction sites where users can purchase or sale goods or services. Auction revenue from two sources are upfront (listing) fee (charge to seller for listing to be maintained over a specified period of time) and transaction fees (facilitating transaction usually based on percentage of revenue earned by seller). Recognize as time basis but check whether no significant vendor obligation to be fulfilled and collection to related receivable is certain.
- Shipping and Handling charges:- See whether this charges are invoice to consumer at composite rate(then it should be part of turnover) or recovered separately as absolute amount or percentage of sale value (it should be recorded separately not include in sales revenue).
- Multiple Element Arrangement:- Its talk about multiple product or service sold at consolidated price. So consolidate price should unbundled in company specific fair value (consider transaction with unrelated party). Example an organization may agree to host another organization website and also provide web maintenance service.
Advertising service:
One of the principal sources of revenue is from:
- Banner Advertisements : Usually hosted for short duration. Organization may enter into agreements whereby they agree to host advertisements for customers, without any minimum guarantee impressions. It is appropriate to recognize advertisement revenue on straight line basis over the period for which the banner is hosted unless another systematic and rational basis of revenue recognition is more representative of the service rendered.
- Sponsorship Advertisement : For longer term and involve more service integration. Contract includes minimum number of impressions or click through. Advertisement agency normally recognized when the related advertisement or commercial appears before the public and the necessary intimation received by the agency and collection of the resulting receivable is reasonably certain.
- Measurement of Consideration in advertising Barter Transactions : Sometime organization enters into advertising barter transactions with each other, in which they exchange rights to place advertisements on each others' online properties. Barter transaction should be recognized at fair value of similar transaction are readily determinable with unrelated party occurred not later than six month.
Other Services:
- Revenue from maintenance of websites including web hosting:- Revenue should be recognized over the period for which website is hosted or maintained provided such services are rendered over the period of contract on continuous basis unless another systematic and rational basis of revenue recognition is more representative of the service rendered.
- Content selling:- Some organization maintains websites which contain text or other material which can be sold as content for a price. Generally a downloading facility is available to purchaser. Organization should determine the time at which delivery of the content to be complete and recognize the corresponding revenue.
Expenditure (Revenue):
Rebates, Discounts and others sales incentives:-
- Organization offers rebates or introductory offers at heavily reduced prices in order to stimulate sales and generate new customers; the value of such rebates should be reduced from turnover;
- Offer specific in relation to a particular customer, these should be shown by way of deduction from the value of turnover in statement of profit and loss account;
- General rebate should be treated as a selling and marketing expenses;
- Rebate in kind, an appropriate estimate of cost be made.
Paid and loyalty programmes:-
AS 29 (Provisions, Contingent liabilities and Contingent Assets)
Provision: A provision is a liability which can be measured only by using substantial degree of estimation.
Recognition: 1) An enterprise has a present obligation as a result of past event; 2) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and 3) A reliable estimate can be made of the amount and obligation.
Ind AS 37 (Provisions, Contingent liabilities and Contingent Assets)
Provision Recognition: In addition to AS 29 it is also recognized on constructive obligation. When the effect of time value is material the amount of provision is the present vale of expenditure expected to be require to settle, discount at pre tax rate.
Following accounting treatment is:
(a) When incentive are specific in relation to customer shown by way deduction from turnover.
(b) Incentive are general in nature then general provision be made on statement of profit and loss based on appropriate estimate of cost itself.
Asset (Intangible Assets)
Applicability of AS-26 or Ind-AS-38
AS 26 (Intangible Assets):
Intangible Asset: Identifiable non monetary assets without physical substance, used for production of goods, rendering of services or administrative purpose;
Amortized: Over useful life not exceeding 10 years in ratio of future economic benefit, if pattern cannot determine reliably, the straight line method used;
Recognize: Future economic benefit ensured and cost measured reliably.
Ind AS 37 (Intangible Assets):
Intangible assets can have indefinite useful lives to be tested for impairment and not amortized. Allows Revaluation Model if active market exist.
Website Development Cost
- Significant cost of organization in developing and maintaining internet websites to promote or advertise their products or services;
- Cost incurred in planning stage shall be expensed.
- Cost incurred in website application and infrastructure development stage shall be capitalized.
- Cost incurred to develop graphics should be capitalized.
- Cost incurred to develop content be expensed.
- Cost incurred in operating stage be expensed.
- First website should amortize in two years from site open to customer and new site developed expense in same year.
As industry is undergoing significant transformation with substantial disruptive innovation in an evolving digital world; The fast pace of E-c causing first year's trading results to be different to the second year, the second year's results to be significantly different to the third year etc. lead non-comparability. This is because information is costly to produce but cheap to reproduce. Indian Industry is currently bracing to deal with various changes in the regulatory and reporting landscape including Goods and Service Tax (ecommerce operator mandatory registration, no exemption and deduct TCS@ 1%), Income Computation and Disclosure Standard (Equalisation levy @6% charge on revenue of non resident not having permanent establishment and General Anti Avoidance Rules), Companies Act 2013(Company bill 2017), Ind AS(Ind AS 115 Revenue from contracts with customers) and others. Remain update, grab opportunity and create history.