Please advise on revenue recognition

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