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Please advise on revenue recognition

Mahesh (Service) (25 Points)

24 January 2013

Company A receives contract of RS 10 million from Company Z

Company A forwards the entire contract value to Company B

Company B subcontracts part of the Job to Company C for Rs 8 million

Company C subcontracts the entire contract received to Company A for Rs 7.5 million

Please guide on the revenue recognition by Company A. Also if party A and C are related party

Company A and B are not related parties. Company B executes a part of the contract on their own and subcontracts the balance to Company C.

There are proper subcontract agreements between A, B and C.

Company A recognised a turnover of RS 17.5 million in their books ( 10 + 7.5) !!

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1 Replies

Amit Dharnia (Trainer on Global education) (98 Points)
Replied 24 January 2013

Company A receives contract of RS 10 million from Company Z Company A forwards the entire contract value to Company B Company B subcontracts part of the Job to Company C for Rs 8 million Company C subcontracts the entire contract received to Company A for Rs 7.5 million Please guide on the revenue recognition by Company A. Also if party A and C are related party

Hi Mahesh,

You need to look at the substance of the transaction rather than legal structure (formal contracts between parties). It is likely here that A, B and C are all related parties and the transaction (sub-contract) is a means to create higher revenue by all. If that is the case, no revenue should be recognised by A other than the original value of INR 10 million.

However, if B is not a related party (though unlikely), A should look into his position if he is acting as an agent for original contractor (Z) to get the contract completed? Or is B merely acting as a party to the contract for the sake of name. Accordingly, the value of revenue for each A and B should be determined.

Appreciate your inputs (if additional information can be obtained in above case).

Thanks