Offsetting of Income and Expenses - Ind AS

 Offsetting of Income & Expenditure:

Facts of the case:

Company RIGG has entered into a contract with the customer to construct and handover the Building. However, based on the requirement of the customer there is an addition in scope of work and the costs incurred along with service charge are reimbursed from the customer.

RIGG subcontracts the work to the third party and recovers the cost along with service charge from the customer.

Can the revenue and expenditure related to additional scope of work be netted off in P&L account?

 

Extracts of the standard:

As per Ind AS 1:

As per para 32, An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an Ind AS.

As per Para 33, An entity reports separately both assets and liabilities, and income and expenses. Offsetting in the statement of profit and loss or balance sheet, except when offsetting reflects the substance of the transaction or other event, detracts from the ability of users both to understand the transactions, other events and conditions that have occurred and to assess the entity’s future cash flows. Measuring assets net of valuation allowances—for example, obsolescence allowances on inventories and doubtful debts allowances on receivables—is not offsetting.

As per para 34, Ind AS 115, Revenue from Contracts with Customers requires an entity to measure revenue from contracts with customers at the amount of consideration to which the entity expects to be entitled in exchange for transferring promised goods or services. For example, the amount of revenue recognised reflects any trade discounts and volume rebates the entity allows. An entity undertakes, in the course of its ordinary activities, other transactions that do not generate revenue but are incidental to the main revenue-generating activities. An entity presents the results of such transactions, when this presentation reflects the substance of the transaction or other event, by netting any income with related expenses arising on the same transaction. For example:

(a) an entity presents gains and losses on the disposal of non-current assets, including investments and operating assets, by deducting from the amount of consideration on disposal the carrying amount of the asset and related selling expenses; and

(b) an entity may net expenditure related to a provision that is recognised in accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, and reimbursed under a contractual arrangement with a third party (for example, a supplier’s warranty agreement) against the related reimbursement.

An entity does not offset income and expense items unless the criteria in paragraph 32 are met.

 

As per IFRS

Assets and liabilities, and income and expenses, must not be offset unless required or permitted by an IFRS.

Examples of income and expenses that are required or permitted to be offset are as follows:

IAS1(34)(a) (a) gains and losses on the disposal of non-current assets, including investments and operating assets, are reported by deducting from the proceeds on disposal the carrying amount of the asset and related selling expenses.

IAS1(34)(b) (b) expenditure related to a provision that is recognised in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and reimbursed under a contractual arrangement with a third party (eg a supplier’s warranty agreement) may be netted against the related reimbursement

IAS1(35) (c) gains and losses arising from a group of similar transactions are reported on a net basis, for example, foreign exchange gains and losses or gains and losses arising on financial instruments held for trading. Such gains and losses are, however, reported separately if they are material.

 

Conclusion:

Based on the facts of the case, RIGG enters into subcontract with third party for the additional scope of work which is completely different from the contract entered with the customer.

Since RIGG charging service fee to the customer for the additional scope of work and the same cannot be considered as an reimbursement. 

Hence RIGG has to disclose both Income and revenue separately in the profit and loss account.

Usually the following can be netted off

- Reimbursement of expenses

- Deferred tax Asset and Liability if it is under same statue as per Ind AS 12