Guidance Note on
Accounting by E-commerce Entities

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)
New Delhi
© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form, or by any means, electronic,
mechanical, photocopying, recording, or otherwise without prior permission, in
writing, from the publisher.

Edition : January, 2021
Research Committee
Committee/Department : research@icai.in
www.icai.org
E-mail : ` 85/-

Website :

Price :

Published by : The Publication Department on behalf of
Printed by the Institute of Chartered Accountants of
India, ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi - 110 002.

: Sahitya Bhawan Publications, Hospital
Road, Agra - 282 003.
September/2020/500 copies
Foreword

In recent times we have witnessed a rise in the number of online transactions
involving buying and selling of products or online services over the internet. In
the E-commerce process, the buyers and the sellers are a mere click-of-the-
mouse away and business is transacted involving technologies such as
internet banking, mobile commerce, electronic fund transfer, etc. In view of
these unique features, varied accounting practices being followed across the
companies. In the above scenario, a need was felt by the Research Committee
of the Institute in bringing out guidance for the benefit of all stakeholders at
large.

The Research Committee has revised ‘Guidance Note on Dot-Com companies’
as the ‘Guidance Note on Accounting by E-commerce Entities’. The old
guidance note dealt with accounting treatment of various revenue and expense
items peculiar to the dot-com business. However, the revised guidance note
deals with accounting by e-commerce entities in respect of accounting issues
relating to revenue and expense recognition.

I would like to congratulate CA. Anuj Goyal, Chairman, Research Committee,
CA. Kemisha Soni, Vice-Chairperson, Research Committee, and other
members of the Research Committee for their contribution in development of
this Guidance Note.

I am confident that this endeavour of the Research Committee will go a long
way in establishing sound principles on Accounting for E-commerce entities
and providing requisite guidance to the members as well as others concerned
stakeholders.

New Delhi CA. Atul Kumar Gupta
January 28, 2021 President, ICAI
Preface

E-commerce is the activity of electronically buying or selling of products or
online services over the internet. The online transactions can be conducted via
mediums like computers, tablets, and smartphones. Most of the transactions
are being done through online mode being ease in doing transactions by the
consumers. In the above scenario, there was need felt for providing guidance
for recording transactions conducted online.

Research Committee had already issued ‘Guidance Note on Accounting by
Dot-com companies’ which dealt with accounting issues related to dot-com
companies. Moreover, a need was felt to revise the above guidance note and
provide more guidance in the form of e-commerce entities. The Committee has
out come out with a revised guidance in the form of ‘Guidance Note on
Accounting by E-commerce entities’ which deals with accounting by e-
commerce entities in respect of certain issues relating to revenue and expense
recognition. The revised guidance note deals with key issues of e-commerce
entities and aims at providing guidance on various accounting issues unique
to e-commerce. This Guidance Note applies to companies preparing financial
statements under Companies (Accounting Standard) Rules 2006, as amended
under Section 133 of the Companies Act, 2013. It also applies to entities such
as LLPs, Partnership firms.

I would like to convey my sincere thanks to CA. Atul Kumar Gupta, President,
ICAI and CA. Nihar N. Jambusaria, Vice-President, ICAI for providing
unflinching guidance on various activities of the Committee. I would like to
convey my sincere thanks to CA. Kemisha Soni, Vice-Chairperson, Research
Committee for her constant support and co-operation.

I would like to take this opportunity to express my gratitude and thanks to CA.
Babu Abraham Kallivayalil, Past Chairman, Research Committee and CA.
Satish Kumar Gupta, Past Vice-Chairman, Research Committee for initiating
the task of revising this Guidance Note in a timely manner for the benefit of all.

I would also like to acknowledge the invaluable contribution made by
CA. M.P. Vijay Kumar, CCM who spared his valuable time for providing
significant inputs and for representing the draft Guidance Note before the
Council, CA. Santosh Maller, Resource Person for formulating the draft of this
Guidance Note, and other members for their invaluable support in this
endeavour of the Research Committee. I am also thankful to the branches of
ICAI, members at large and to various representatives of industry for giving
their invaluable comments and suggestions on the exposure draft on the said
Guidance Note.

I also appreciate the untiring efforts made by Dr. Amit Kumar Agrawal,
Secretary, Research Committee, CA. Amit Agarwal, Senior Executive Officer
and CA. Swati Yadav, Project Associate, Research Committee in finalising the
Guidance Note.

I believe and trust that this Guidance Note would be immensely useful for the
members of the Institute as well as others concerned.

New Delhi CA. Anuj Goyal
January 27, 2021 Chairman, Research Committee
Table of Content

S.N. Topic Section Page
Number No.
1 Introduction 1
2 E-Commerce 1-2 1
3 Scope 3 -11 4
4 Revenue Recognition 4
5 Membership and subscription 12 6
6 Merchandising activities 13-15 9
7 Auctions 16-27 11
8 Shipping and Handling activities 28 -36 11
9 Multiple element arrangements 37 -38 12
10 Right of Returns 39-40 12
11 Right of Return in exchange for cash 41-42 14
12 Right of return against goods or services or 43-45 16

coupons 46 17
13 Consignment arrangements 47 18
14 Significant financing component 19
15 Warranties 48 20
16 Advertising services 49-50 20
17 Revenue from transactions involving exchange 51-52
53-55 21
for non-cash consideration 56-57 22
18 Other services 23
19 Website/mobile application development cost 58-59
20 Rebates, discount, Gift vouchers, Loyalty and 60-64 23
65-67 40
other sales incentives
21 Point and loyalty programmes 68-92
22 Accounting for gifts cards/ coupons 93
23 Equity Based Consideration 94-98 40

24 Inventory accounting 99-102 42

25 Advertisement cost 103 43

26 Cash handling 104-105 43

27 Disclosure 106 44

Appendix – Illustrative list of Activities 45

performed at Planning Stage

Glossary 48
Guidance Note on
Accounting by E-commerce Entities

(The following is the text of the Guidance Note on Accounting by E-commerce
entities, issued by the Institute of Chartered Accountants of India. With the
issuance of this Guidance Note, the Guidance Note on Accounting by Dot-
Com Companies, issued by the Institute of Chartered Accountants of India in
February 2001, stands withdrawn.)

Introduction

1. This Guidance Note deals with accounting by e-commerce entities in
respect of certain issues relating to revenue and expense recognition.

2. Some of the accounting issues in e-commerce entities have arisen due
to the new business models being used in such entities. Some accounting
issues, such as those relating to advertising partnerships, rebates, point and
loyalty programmes, which are more common in business carried on by e-
commerce entities.

E-commerce

3. E-commerce (electronic commerce) is the activity of electronically
buying or selling of products or online services over the Internet. Electronic
commerce draws on technologies such as mobile commerce, electronic funds
transfer, supply chain management, internet marketing, online transaction
processing, electronic data interchange (EDI), inventory management
systems, and automated data collection systems. E-commerce is in turn driven
by the technological advances of the semiconductor industry and is the largest
sector of the electronics industry. E-commerce is a business model that lets
the firms and individuals conduct business over electronic networks, such as
internet.

4. E-commerce, which can be conducted over computers, tablets, or
smartphones may be thought of like a digital version of mail-order catalogue
shopping. Nearly every imaginable product and service is available through e-
commerce transactions, including books, music, plane tickets, and financial
services such as stock investing and online banking.
Guidance Note on Accounting by E-commerce Entities

5. One form of e-commerce companies is that of on-line content
companies focus on the content sites, i.e., the internet sites that provide news,
information and knowledge as their main business. These include companies
that provide Internet navigation services and reference guide information for
World Wide Web and that publish, provide or present proprietary, advertising,
and/or third-party content. Examples of content sites include Wikipedia, etc.

6. Another form of e-commerce is electronic retailing is the sale of goods
and services through the Internet. E-tailing can include business-to-business
(B2B) and business-to-consumer (B2C) sales of products and services. E-
tailing requires companies to tailor their business models to capture Internet
sales, which can include building out distribution channels such as
warehouses, Internet webpages, and product shipping centers. Examples of
e-tailing vendors are Flipkart, Amazon, Makemytrip, Yatra.com, Trivago and
Grofers. Electronic retailing includes a broad range of companies and
industries. Internet commerce companies sell products and services over the
websites on the Internet and include on-line dealers. Mode of payments to e-
commerce entities by customers may take various forms, such as, debit card,
credit card, net banking, electronic wallet payment, cash against delivery or
any other mode.

7. E-commerce entities may operate in various major market segments,
for example:

• Business to business (B2B)

• Business to consumer(B2C)

• Consumer to consumer(C2C)

• Consumer to business(C2B)

B2B sites link different businesses or different parts of a business.
Transactions on these sites take place between industrial manufacturers,
wholesalers or retailers. Special features of these transactions are high
volumes per customer, lesser number of customers, secured payment
systems, privacy of information, etc. Examples of sites in this category are
indiaconstruction.com, clickforsteel.com and seekandsource.com.

B2C sites sell products or services directly to consumers. A large number of
e-commerce entities fall in this category. Transactions on these websites are
characterised by low volumes per consumer and a large number of consumers.
Examples of sites in this category are flipkart.com, amazon.com, urban clap,

2
Guidance Note on Accounting by E-commerce Entities

swiggy, zomato, uber eats, red bus, IRCTC, rediff.com, jaldi.com,
indiatimes.com, zipahead.com, and fabmart.com.
C2C sites enable consumers to buy and sell from each other through auction
or other similar sites. Examples of sites in this category are bazee.com,
snapdeal.com, olx.com, quikr.com, jabong.com, ebay.com, myntra.com and
bidorbuy.com.
C2B sites enable consumers to set prices and business entities bid to offer
products and services. Examples of sites in this category are razorfinish.com
and priceline.com.
8. An entity can earn revenue in many ways such as :
1. Sale of the product directly to consumer.
2. B2C and B2B can also earn by subscription mode.
3. Online advertising.

Elements of e-commerce transaction

9. In an e-commerce transaction, all the traditional elements of commerce
exist though with some differences. The following elements are ordinarily
present in an e-commerce transaction:
• A product or service;
• a place, namely, a website, that displays the products/services and

where a business transaction takes place;
• way for the people to visit the place ( Web browser);
• a way to accept orders, e.g., an on-line form;
• a way to accept consideration for the transaction – e.g., through

electronic mode of payment.
10. Further, the entities may use more traditional techniques either on-line
or through the mail;
• a facility to ship products to customers (often, outsourced). In the case

of software and information, the product can be transferred over the
Web through a file download mechanism;
• a way to accept rejected/returned goods and services;

3
Guidance Note on Accounting by E-commerce Entities

• a way to handle warranty claims, if necessary; and

• a way to provide customer service [often through e-mail, on-line forms,
on-line knowledge bases and frequently asked questions (FAQs)].

11. Apart from the above elements of e-commerce transactions, certain
facilities are also provided on the website, for example, information of the exact
status of an order may be provided to the customer.

Scope

12. This Guidance Note aims at providing a perspective on the various
accounting issues which are unique to the e-commerce. In case of entities
normally carrying on businesses other than e-commerce, the
recommendations contained in this Guidance Note should be applied for
recording e-commerce transactions undertaken by them.

This Guidance Note applies to companies preparing financial statements
under Companies (Accounting Standards) Rules, 2006, as amended, under
Section 133 of Companies Act, 2013.

This Guidance Note also applies to entities such as Limited Liabilities
Partnership firms and Partnership firms that prepare financial statements
under the Accounting Standards issued by the ICAI.

This Guidance Note deals with specific accounting aspects and does not deal
with other generic accounting issues commonly faced across industries. This
Guidance Note deals with the key issues of e-commerce companies.

Revenue Recognition

13. The main sources of revenue of e-commerce companies presently
include:

• Merchandising activities;

• Membership and subscription;

• Advertising services; and

• Other services like web-hosting, content selling, etc.

14. E-commerce companies are often valued based on revenue multiples
and, therefore, it is one of the most important performance parameters. Most
e-commerce companies either accept payments online through credit cards,

4
Guidance Note on Accounting by E-commerce Entities

internet banking, debit cards or cash on delivery. Further, in most cases, the
delivery is the responsibility of the entity and, hence, it is important to
determine when does the ‘risk and rewards’ under Companies (Accounting
Standards) Rules, 2006, as amended, under Section 133 of Companies Act,
2013. This is an important issue for business-to-customer as well as business-
to-business models.

15. The basic principles of revenue recognition as set out in Accounting
Standard (AS) 9, ‘Revenue Recognition’, notified under Companies
(Accounting Standards) Rules, 2006, as amended, under Section 133 of
Companies Act, 2013 and that issued by the ICAI apply to recognition of
revenue from the above sources. The relevant extracts from AS 9 that are
relevant in this context are reproduced below:

“4.1 Revenue is the gross inflow of cash, receivables or other
consideration arising in the course of the ordinary activities of an
entity from the sale of goods, from the rendering of services, and
from the use by others of entity resources yielding interest,
royalties and dividends. Revenue is measured by the charges made
to customers or clients for goods supplied and services rendered
to them and by the charges and rewards arising from the use of
resources by them. In an agency relationship, the revenue is the
amount of commission and not the gross inflow of cash,
receivables or other consideration.”

“10. Revenue from sales or service transactions should be
recognised when the requirements as to performance set out in
paragraphs 11 and 12 are satisfied, provided that at the time of
performance it is not unreasonable to expect ultimate collection. If
at the time of raising of any claim it is unreasonable to expect
ultimate collection, revenue recognition should be postponed.”

“11. In a transaction involving the sale of goods, performance
should be regarded as being achieved when the following
conditions have been fulfilled:

(i) the seller of goods has transferred to the buyer the property
in the goods for a price or all significant risks and rewards
of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to
a degree usually associated with ownership; and

5
Guidance Note on Accounting by E-commerce Entities

(ii) no significant uncertainty exists regarding the amount of the
consideration that will be derived from the sale of the
goods.”

“12. In a transaction involving the rendering of services, performance
should be measured either under the completed service contract method
or under the proportionate completion method.

Such performance should be regarded as being achieved when no
significant uncertainty exists regarding the amount of the consideration
that will be derived from rendering the service.”

Under AS 9 principles, apart from the general criteria, revenue is recognised
either on the transfer of property in the goods or transfer of significant risk and
rewards of ownership. In evaluating the point at which the risks and rewards
of ownership transfer from the seller to the buyer, one of the key considerations
is the shipment terms.

Membership and subscription

16. Many a times, entities receive upfront payments from customers before
they provide the contracted service or deliver a good. Such upfront fees
generally relate to the activation or set-up of a good to be used or a service to
be provided in the future. In many cases, the upfront amounts paid by the
customer are non-refundable. In order to avail of the services provided by e-
commerce entities, 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 an additional fee.

17. The membership/registration fees received by an e-commerce entity
may fall in the following categories:

• Non-refundable fees that entitle a member to use the services of the
website by making payment for all services separately;

• Non-refundable fees that entitle a member to use the services of the
website indefinitely without making any further payment for use of
services;

• Non-refundable fees that entitle a member to use the services of the
website for a specified period of time;

6
Guidance Note on Accounting by E-commerce Entities

• Fees that are refundable subject to the fulfilment of certain conditions
stipulated in the subscription agreement. Usually contractual
stipulations require such conditions to be fulfilled within a specified time
period; and

• Periodic membership/subscription fees on monthly, quarterly, annual or
such other basis.

18. E-commerce companies often offer membership services to customers,
wherein customers pay non-refundable upfront fees to the e-commerce entity.
In return, the members (customers) get, for example, discounts and other
benefits in partner restaurants.

19. AS 9 contains guidance on the recognition of non-refundable fees as
revenue.

20. Revenue earning process is completed by performance of specified
actions as per the terms of the arrangements, not simply by originating a
revenue generating arrangement.

21. Supply of products or rendering of services by e-commerce companies
may involve charge of a non-refundable upfront fee/initial (membership/
registration) fee with or without subsequent payments for products or services
to be provided in future. Under AS 9, revenue recognition from these sources
will depend on the nature of the services being provided. AS 9 states that
entrance fee received is generally capitalised. If the membership fee permits
only membership and all other services or products are paid for separately, or
if there is a separate annual subscription, the fee should be recognised when
received. If the membership fee entitles the member to services or publications
to be provided during the year, it should be recognised on a systematic and
rational basis having regard to the timing and nature of all. The capitalised/
deferred membership fee may be presented in a separate line item such as,
“deferred membership fees”, under liabilities in the balance sheet.

22. With regard to non-refundable fees that entitle a member to use the
services of the website indefinitely without making any further payment for use
of services, the initial fee, in substance, represents wholly or partly an advance
payment for products or services to be provided in future. This implies that it
is expected that the services would be provided on a continuous basis after
payment of up-front fee. The non-refundable up-front fee and the continuing
performance obligation related to the services to be provided or products to be
delivered form an integrated package.

7
Guidance Note on Accounting by E-commerce Entities

23. Accordingly, up-front membership fees, even if non-refundable, are
actually earned as the products and/or services are delivered and/or rendered
over the term of the arrangement or the expected period of performance.

24. Consequently, recognition of such non-refundable fees should be
generally deferred and the same should be recognised systematically over the
period during which fees are earned. However, keeping in view the uncertain
nature of business of an e-commerce entity, non-refundable fees that entitle a
member to use the services of the website indefinitely should be recognised
as revenue over a reasonable period on a systematic and rational basis, i.e.,
on time proportion basis or any other basis, e.g., usage basis, whichever is
more representative of the services rendered. In case the entity also provides
services for periodic subscription, the revenue in respect of non-refundable
fees to be recognised on the aforesaid basis should not exceed the
corresponding periodic subscription.

25. Non-refundable fees that entitle a member to use the services of the
website for a specified period of time in excess of the reasonable period of
time should be recognised as revenue over a longer period of time based on
the members’ entitlements. However, in case the specified period is less than
the reasonable period, the fees should be recognised as revenue on a
systematic and rational basis usually on a time proportion basis over the
specified period unless another systematic and rational basis is more
representative of the services rendered, e.g., the usage basis.

26. In respect of membership fees that are refundable to members subject
to fulfilment of certain conditions (for example, a stipulated volume of usage
within a specified period, etc.), it is not appropriate to recognise such fees as
revenue on receipt thereof since it is expected that a member would ordinarily
fulfil the conditions. Accordingly, the revenue from such transactions should
be recognised when it becomes reasonably certain that conditions would not
be fulfilled. Pending the recognition of revenue as aforesaid, the amounts
received from customers should be credited and retained in a liability account
such as ‘Customers Refundable Fees Account’. The entity should periodically
review the status of this account to ascertain the extent of fulfilment or
otherwise of the conditions.

27. Periodic membership subscriptions paid by members to avail of the
services offered by the website should be recognised as revenue over the
period of the subscription, in accordance with the principles of AS 9.

8
Guidance Note on Accounting by E-commerce Entities

Merchandising activities

28. In case of e-commerce entities, generally multiple parties are involved
in providing good and services. When there are multiple parties involved in
providing goods or services to a customer, an entity evaluates the nature of its
promise to the customer.

29. One of the significant issues in accounting by e-commerce companies
is whether to recognise gross amount of revenues and the related cost of sales
or to recognise the revenue on net basis, similar to commission. The
significance of this issue is enhanced due to the importance often placed on
the revenue being used as the basis for valuation of e-commerce companies.

30. The question of gross versus net revenue and cost recognition ordinarily
arises in connection with e-commerce companies that distribute or resell third
party products or services. This issue typically arises in the B2C sites. Often,
there may be regulatory restrictions on whether an entity can sell its products
directly to end-customers. This can also have an impact on the presentation
of revenue is the books of the B2B and B2C companies on a gross or net basis.

31. In assessing whether revenue should be reported on gross basis with
separate recognition of cost of sales or on net basis, under AS 9, it should be
considered whether the e-commerce entity:

• acts as a principal in the transaction, i.e., it assumes significant risks
and rewards of ownership, such as the risk of loss in collection, delivery,
or returns; or

• acts as an agent or broker for sale of goods or rendering of services,
i.e., does not assume significant risks and rewards of ownership;
compensation being commission or fee. In this case, the e-commerce
entity is merely engaged in providing the service of bringing the
purchaser and the seller together.

32. Where an e-commerce entity acts as a principal in the transaction, i.e.,
significant risks and rewards of ownership are first acquired by it and then
transferred on sale, it is appropriate to recognise revenues and the related
costs on a gross basis. If the e-commerce entity does not do so, i.e., it merely
acts as an agent, it would be appropriate to recognise only the service charges
as revenue, similar to commission.

33. The Technical Guide on Accounting Issues in the Retail Sector is issued

9
Guidance Note on Accounting by E-commerce Entities

by the Institute of Chartered Accountants of India, provides guidance on
presentation of revenues. As per the Technical Guide, some of the factors that
indicate that an entity is acting as a principal in transactions could include
(indicative list only):

• The customer understands that the entity is acting as the primary obligor
in the arrangement

• The entity is able to set the selling price with the customer

• The entity has inventory risk

• The entity performs part of the services provided or modifies the goods
supplied

• The entity has or assumes the credit risk associated with the transaction

34. Determining whether an entity is acting as an agent or principal is based
on an evaluation of the risks and responsibilities taken by the entity, including
factors as mentioned above such an inventory risk and responsibility for the
delivery of goods or services.

35. Revenue represents the amount received by an entity for its own
account. Therefore, for a principal, revenue should be presented at its gross
amount and is measured before deducting related costs such as cost of
materials and salaries. On the other hand, in an agency relationship, the
amounts collected on behalf of and passed on to the principal is not revenue
of the agent. The revenue of the agent is the amount of net margin, plus any
other amount charged by the agent to the principal or other parties. The
revenue collected from the ultimate customer (net of taxes) is recorded as
revenue by the principal. The principal recognises the consideration retained
by the agent as a cost.

36. Common example is that of an e-commerce entity purchasing traded
goods from a wholesaler. E-commerce entity generally would sell these goods
to the end customer and may or may not carry the associated inventory risk as
it purchases goods from the wholesaler only when it receives orders from the
end customer. However, it may bear the risk of those inventory items that have
been returned by the customer. In such cases, the e-commerce entity does
not seem to bear significant inventory risk, however, it may bear the following:

• Credit risk

• Is primary responsible for providing the goods to the customer, i.e.,
fulfilling the order

10
Guidance Note on Accounting by E-commerce Entities

• Direct pricing discretion

• Discretion is selecting the supplies/ wholesaler

In such a case, the e-commerce entity may assess the above criteria to be
significant and reflect the gross billing to its customers as its revenue.

Auctions

37. Some companies host auction sites as part of their on-line activities
where users can purchase or sell goods or services. The entity ordinarily earns
auction revenues through two sources – up-front (listing) fees and transaction-
based fees.

38. Under AS 9, listing fees are the up-front fees that the e-commerce entity
receives at the time a seller registers for a listing to be maintained over a
specified period of time. The purchaser is paying for a service that is delivered
over time. It is appropriate that listing fees are recognised over the period of
the contract or arrangement, provided there are no significant outstanding
vendor obligations to be fulfilled and collection of the related receivable is
reasonably certain. Transaction fees are for facilitating the transaction and are
usually based on a percentage of the revenue earned by the seller from the
sale. Such fees should be recognised as revenue by the entity upon
completion of the transaction or at the time when no further vendor obligations
remain to be performed as per the terms with the vendor.

Shipping and handling activities

39. E-commerce companies selling products on-line often charge
customers for shipping and handling activities. Such charges may or may not
be a direct reimbursement of the costs incurred by e-commerce companies.
Some companies display the charges separately whereas some do not.

40. In determining accounting treatment under AS 9, one of the
considerations would be whether the products sold on-line are invoiced to the
customers at a composite rate including shipping and handling charges or
whether shipping and handling charges are recovered separately as an
absolute amount or as a percentage of the sale value. In the former case, it
may be appropriate to include such charges as a component of sales revenue
provided a clear distinction cannot be made between the product value and
the shipping and handling charge component. Where such charges are
recovered as an absolute amount or as a percentage of sale value separately,

11
Guidance Note on Accounting by E-commerce Entities

these should not be included in sales revenue but should be recorded
separately. Thus, such charges should not be included in computing the value
of turnover to be disclosed in the statement of profit and loss. Shipping and
handling charges should be recognised separately as an income and the
actual cost incurred in respect thereof should be recognised as an expense.
However, where these charges are clearly a reimbursement by the buyer of
the actual cost incurred by the seller, these should be shown as a deduction
from the shipping and handling cost in the statement of profit and loss, if the
amount involved is material.

Multiple element arrangements

41. A multiple element arrangement generally exists where an e-commerce
entity agrees to deliver more than one product/ service concurrently and
deliver certain additional products/services in future. These additional
products/services may include upgrades, enhancements or maintenance
services. It is sometimes customary to bundle such products and services for
a consolidated price.

42. AS 9 does not provide any specific guidance on multiple-element sale
arrangements. However, various past pronouncements of the ICAI have stated
that it is appropriate to ‘unbundle’ the separate elements of the arrangement
or contract. For this purpose, entity-specific fair values in respect of which
objective evidence is available should be used, i.e., what the entity would have
received had it sold each item/ service separately. Entity-specific objective
evidence of fair value is determined in respect of transactions with unrelated
parties. For example, an e-commerce entity may agree to host another entity’s
website and also provide web maintenance service for a fixed fee of ` 15 lakh
for a term of one year and six months, respectively. If the e-commerce entity
has evidence that in its recent transactions, it has charged separate fees for
web hosting and web maintenance of ` 12 lakh for one year and ` 6 lakh for
six months, respectively, then revenue in respect of the composite service now
being provided should be recognised in the ratio of 2:1, i.e., ` 10 lakh from
web hosting over one year and ` 5 lakh as revenue from web maintenance
services over a period of six months.

Right of Returns

43. E-commerce companies, particularly e-tailers, often provide option of
returning the goods for exchange either in cash or goods or services or by way

12
Guidance Note on Accounting by E-commerce Entities

of store credit coupons which can be used by the customer for subsequent
purchases, either with or without a time limit. In such cases, the entity would
need to evaluate the appropriate timing of recognising revenue as there is
certain level of uncertainty attached as to when and whether the customer
would exchange the goods or services and further whether the customer would
utilise the coupons, if any, obtained in exchange of returning the goods or
services. While most retailers are able to discern past trends with respect to
returns, others may have a varied and disparate experience of ‘sales returns’
and would need to make the best estimates with the available information.

44. Paragraph 10 of AS 9 states the following:

Revenue from sales or service transactions should be recognised
when the requirements as to performance set out in paragraphs 11
and 12 are satisfied, provided that at the time of performance it is
not unreasonable to expect ultimate collection. If at the time of
raising of any claim it is unreasonable to expect ultimate collection,
revenue recognition should be postponed.

Further, with regard to sale of goods, the criteria set out for revenue
recognition in paragraph 11 of AS 9, “Revenue Recognition”, are:

In a transaction involving the sale of goods, performance should be
regarded as being achieved when the following conditions have
been fulfilled:

(i) the seller of goods has transferred to the buyer the property
in the goods for a price or all significant risks and rewards
of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to
a degree usually associated with ownership; and

(ii) no significant uncertainty exists regarding the amount of the
consideration that will be derived from the sale of the goods.

45. With regard to revenue recognition for service contracts, the criteria is
set out in Paragraph 12 of AS 9 states that: -

In a transaction involving the rendering of services, performance
should be measured either under the completed service contract
method or under the proportionate completion method, whichever
relates the revenue to the work accomplished. Such performance
should be regarded as being achieved when no significant

13
Guidance Note on Accounting by E-commerce Entities

uncertainty exists regarding the amount of the consideration that
will be derived from rendering the service.

Following Illustration in AS 9 explains the application of AS 9 to commercial
situations.

“A. Sale of Goods

2. Delivered subject to conditions

(c) guaranteed sales i.e. delivery is made giving the buyer an
unlimited right of return

Recognition of revenue in such circumstances will depend
on the substance of the agreement. In the case of retail sales
offering a guarantee of “money back if not completely
satisfied” it may be appropriate to recognise the sale but to
make a suitable provision for returns based on previous
experience.

(d) consignment sales i.e. a delivery is made whereby the
recipient undertakes to sell the goods on behalf of the
consignor. Revenue should not be recognised until the
goods are sold to a third party.”

Therefore, in case of sales with customers’ right to return in exchange for cash,
AS 9 requires recognition of revenue will depend on the substance of the
agreement. In the case of retail sales offering a guarantee of “money back if
not completely satisfied” it may be appropriate to recognise the sale but to
make a suitable provision for returns based on previous experience. In other
cases, the substance of the agreement may amount to a sale on a
consignment basis.

Right of Return in exchange for cash

46. In cases where such right of return is provided in exchange for cash,
under AS 9, it is appropriate to proceed on the basis that the sales, to the
extent of estimate of likely returns, have not been made. Accordingly, sales
recognised during the period should be reduced by the estimate of the returns,
at the gross amount of sales and a corresponding current asset should be
recognised representing the inventory that may be returned.

14
Guidance Note on Accounting by E-commerce Entities

Example: Right of return in exchange of cash under AS

Arc, an online retailer, sells shirts with a right to the customers to return
the shirts within 60 days of purchase through its website and mobile
application. Returns are accepted with proof of purchase and if the shirts
are unused and in good condition such that Arc can sell it as new.
Historically, 10% of the Arc’s sales are returned by customers and this
rate is expected to continue. History has shown that all such returned
shirts are resold at full price. The gross margin on sale of shirts is 5%.
Customers have option to return shirts by communicating through Arc’s
mobile application or website subsequent to which Arc refunds money
to the customer against returns, if return is in an acceptable condition.

Arc has sold shirts of sale value of ` 1000 and the period of return is
not expired till the end of the financial year in which sales are made. No
returns have been received till the end of the financial year.

There are returns of ` 80 in the following financial year before the expiry
of return period. The accounting entries in this regard are as under.

At the time of initial sale:

Cash/bank Dr. 1000 Cash received at the time of sale
Revenue recognised to the full extent
Sales Cr. 1000

At the time of Year end

Sales Dr. 100 10% of sales based in the past
trend of expected returns
Provision for Cr. 100
Cost of sales - 95% of sale price
Expected right to – gross margin being 5 %

return (Current

Liability)

Expected returns Dr. 95
from customers
(Current asset)

Cost of Sales Cr 95

In the following financial year
15
Guidance Note on Accounting by E-commerce Entities

Provision for Dr. 100

expected right of

return (Current

Liability)

Cash/Bank Cr 80 Cash paid on right of return
exercised by the customer
Sales Cr 20
Balance sales (` 100- ` 80) for
Inventory Dr 76 which the period of right to
return has expired
Cost of sales Dr. 19
Inventory recognised to the
Expected returns Cr 95 extent of goods returned [(`
from customers 80*` 95)/` 100]
(Current asset)
Cost of sales recognised to the
extent of sales revenue of ` 20

Adjustment relating to costs
reversed

Right of return against goods or services or
coupons

47. Under AS 9, in the case of right of return in exchange of goods or
services or coupons giving the right to the customers to exchange the goods
or services sold against other goods/services, the sales against which such
right of return is given, should be treated to have been effected and
simultaneously provision for expected returns should be made. Provision
should be measured as the best estimate of the loss expected to be incurred
by the retailer in respect of the estimated returns including any estimated
incremental cost that would be necessary to resell the goods expected to be
returned.

Example- Return of goods against goods/ services/ coupons

X is an e-tailer which sells goods through its mobile application/ website.
The customers have a right to return the goods within thirty days of
purchase. Returns are accepted with proof of purchase and only if they
are in good condition such that X can sell it. Customers do not get cash

16
Guidance Note on Accounting by E-commerce Entities

on return but get goods or coupons which can only be redeemed for
goods against returned goods. Estimates show that 10% of all goods
sold are returned/exchanged.

At the end of the financial year, the period of right to return has not
expired in case of goods sold for ` 1000. It is expected that the returns,
if any, will be sold at 90% of original sale price. The margin on sale is
20% with regard to such sale of ` 1,000. The accounting entries will be
as under:

At the time of making the sales:

Cash/ Bank Dr. 1,000

To Sales Cr. 1,000

At the end of the year:

No journal entry

The reason would be that though 10% of ` 1000 worth of goods sold
are likely to be returned as per the trend, no loss is expected as the
goods are not expected to be sold below cost. (Since expected returns
at sale price would be 10% of ` 1000 i.e. ` 100 and cost would be 80%
of ` 100 i.e. ` 80.)

However, if it is expected that the returned goods will be sold for say
70% of the original sale price (70% of ` 100, i.e., ` 70), provision for
expected loss should be made. The entry will be as under:

Profit & Loss A/c Dr. ` 10

To Provision for expected loss on returns Cr. ` 10

Since as explained above, the cost is ` 80 and expected selling price
being 70% of original sale price of ` 100 i.e. ` 70 and thus expected
loss is ` 10.

Consignment arrangements

48. Many e-tailers sell their products through resellers or consignment
agents. Under AS 9, under Companies (Accounting Standards) Rules, 2006,
the companies may use sell-through approach for some arrangements with
resellers where revenue is not recognised until the product is sold by the
distributor to the end customer (that is, the consumer) because the distributor

17
Guidance Note on Accounting by E-commerce Entities

may be able to return the unsold product, rotate older stock, or receive pricing
concessions. As a result, the risks and rewards of ownership have not
transferred. Some entities sell products using consignment arrangements
under which the buyer (a dealer or distributor) takes physical possession of
the goods but does not assume all of the risks and rewards.

Following Illustration in AS 9 explains the application of AS 9 to commercial
situations.

“A. Sale of Goods

2. Delivered subject to conditions

(c) guaranteed sales i.e. delivery is made giving the buyer an
unlimited right of return

Recognition of revenue in such circumstances will depend
on the substance of the agreement. In the case of retail sales
offering a guarantee of “money back if not completely
satisfied” it may be appropriate to recognise the sale but to
make a suitable provision for returns based on previous
experience. In other cases, the substance of the agreement
may amount to a sale on consignment, in which case it
should be treated as indicated below.

(d) consignment sales i.e. a delivery is made whereby the
recipient undertakes to sell the goods on behalf of the
consignor. Revenue should not be recognised until the
goods are sold to a third party.”

Therefore, under AS 9, generally, revenue should not be recognised until the
product is sold to the end-customer because they do not meet all of the criteria
in the risks and rewards model in AS 9 to recognise revenue on delivery to the
reseller.

Significant financing component

49. Certain e-commerce entities give extended financing to customers, for
example, through a ‘buy now, pay later’ scheme or an extended EMI payment
scheme. When the customer is allowed to pay in arrears and the sale
realisation is deferred, it can be construed that the entity is effectively providing
financing to the customer. Conversely, in certain cases, the customer may pay
in advance. This may give rise to a question – whether the entity has effectively

18
Guidance Note on Accounting by E-commerce Entities

received financing from the customer.

50. AS 9 does not provide any specific guidance on how to account for
arrangements with extended financing to the customers and revenue is
recognised at the contractual value of the consideration receivable.

Warranties

51. Such sale of additional or extended warranties are, in substance, sale
of separate product/service, distinct from the sale of goods/services with which
the same are sold. Also, such additional or extended warranties are distinct
from the original warranties offered by the manufacturer of the products. Initial
or original warranties offered by the manufacturer are accounted for by the
manufacturer as liability in accordance with Accounting Standard (AS) 29,
Provisions, Contingent Liabilities and Contingent Assets.

52. The accounting treatment of sale of an extended warranty by an online
retailer is illustrated below:

Example:

A retailer sells electrical goods. The goods come with a manufacturer's
one-year warranty. The retailer also offers customers the option of
purchasing an extended warranty to cover a further three-year period
after the expiry of the manufacturer's warranty.

The sales price of the extended warranty is ` 120. The retailer typically
receives valid warranty claims from 3% of customers during the
extended warranty period. The average cost of repairing or replacing
the goods under the warranty is ` 400 per valid claim.

As per the multiple element arrangement discussion, revenue
associated with the extended warranty is deferred and recognised on a
straight-line basis over the period for which the extended warranty
service is provided (unless there is evidence that some other method
better represents the stage of completion). Accordingly, in the year of
sale, revenue of ` 120 is not recognised (recognition is deferred) and
the same is recognised annually. Thus, annual revenue of ` 40 (` 120
divided by 3) is recognised each year as income from services-
‘warranty’ or as ‘other operating income’.

Costs incurred to fulfil the warranty obligation are charged to cost of
sales as incurred. The arrangement is monitored to ensure that the

19
Guidance Note on Accounting by E-commerce Entities

expected cost of the warranty does not exceed the amount of deferred
revenue. If this occurs, the warranty contract will be onerous, and a
provision is recognised.

Advertising services

53. One of the principal sources of revenue of e-commerce companies is
from the sale of banner and sponsorship advertisements. Banner
advertisements are usually hosted for a short duration. Sponsorship
advertising contracts have longer terms than banner advertising contracts and
also involve more service integration. High profile promotional sponsorships
are typically focused on a particular event, such as sweepstakes and lotteries.
Visitors to the website are ordinarily encouraged to complete the transaction
by clicking on a hypertext link, also known as ‘click-through’.

54. An e-commerce entity’s obligations typically include guarantees of
minimum number of impressions or click-through. Impressions are the number
of times that an advertisement appears in pages viewed by users of the e-
commerce company’s on-line sites. It is appropriate to recognise revenue on
the basis of the number of impressions or ‘click-through’ unless another
systematic and rational basis of revenue recognition is more representative of
the services rendered.

55. Entities may enter into agreements whereby they agree to host
advertisements for customers, without any minimum guaranteed impressions.
For example, an entity may enter into an agreement with another entity to host
a banner advertisement containing details of products/services offered by that
entity. In this case, it is appropriate to recognise advertising revenue on
straight-line basis over the period for which the banner is to be hosted unless
another systematic and rational basis of revenue recognition is more
representative of the services rendered.

Revenue from transactions involving exchange for
non-cash consideration

56. E-commerce entities sometimes enter into arrangements with non-cash
consideration, for example, advertising barter transactions. For instance, the
entity may exchange rights to place advertisements on each other’s’ on-line
properties, i.e., websites or web pages. This may take the form of a barter
transaction involving exchange of advertising time for products or services.

20
Guidance Note on Accounting by E-commerce Entities

Historically, some entities in high-growth industries allegedly engaged in
transactions in which goods or services were transferred back and forth
between the same entities in an attempt to show higher transaction volume
and gross revenue.

57. AS 9 does not prescribe any specific guidance with respect to
measurement of non-cash consideration. However, as per Paragraph 29 of
Accounting Standard (AS) 13 Accounting for Investments states as follows:

29. If an investment is acquired, or partly acquired, by the issue
of shares or other securities, the acquisition cost should be the fair
value of the securities issued (which in appropriate cases may be
indicated by the issue price as determined by statutory
authorities). The fair value may not necessarily be equal to the
nominal or par value of the securities issued. If an investment is
acquired in exchange for another asset, the acquisition cost of the
investment should be determined by reference to the fair value of
the asset given up. Alternatively, the acquisition cost of the
investment may be determined with reference to the fair value of
the investment acquired if it is more clearly evident.

Other services

Revenue from maintenance of websites including web
hosting

58. E-commerce companies may also earn revenue from hosting websites
for their customers, maintenance of the customers’ websites or providing such
other services. Revenue from these services should be recognised over the
period for which the website is to be hosted or maintained provided such
services are rendered over the period of the contract on continuous basis
unless another systematic and rational basis of revenue recognition is more
representative of the services rendered.

Content Selling

59. Some companies maintain websites which contain text or other material
which can be sold as a content for a price. Generally, a downloading facility of
such content is available to the purchaser. In such a case, a question arises
as to the timing of the recognition of revenue from the sale of the content
downloaded by the customer. Applying the general principle of revenue

21
Guidance Note on Accounting by E-commerce Entities

recognition, the content should generally considered to be sold when it is
delivered to the purchaser. Therefore, keeping in view the terms of individual
arrangements and the other relevant facts involved, the e-commerce entity
should determine the time at which the delivery of the content is considered to
be complete and recognise the corresponding revenue.

Website/ mobile application development costs

60. New website or mobile application development costs of an entity,
should be accumulated, along with other costs incurred up to the time the
website is thrown open to the users thereof. Such costs include cost incurred
in performing the activities relating to planning the website, obtaining and
registering an Internet domain name, testing the website applications, creating
initial graphics about website, etc.

61. Technology-related development costs representing all directly
attributable development costs and including vendor invoices towards costs of
design, configuration, coding, installation and testing of websites an d mobile
platforms are capitalised until implementation. Upon implementation, the asset
is amortised to expense over its estimated useful life. Ongoing technology-
related post-implementation costs of operation and application maintenance
are charged to expense as incurred in accordance with AS 26 “Intangible
Assets” under Companies (Accounting Standards) Rules, 2006.

62. Keeping in view the nature of the e-commerce business, particularly the
susceptibility to the rapid technological obsolescence, it is recommended that
such costs that are accumulated should be amortised on a systematic and
rational basis, over a period of 3-5 years after the website is accessible to the
users thereof. The costs so accumulated during the development should be
presented under the head ‘Intangible Asset under development’. All costs
incurred, including those for development of new websites, after the first
website/ mobile application of the entity becomes open to the users should be
expensed in the period in which they are incurred.

63. An e-commerce entity would also incur expenditure on certain items that
are similar to entities in other businesses, e.g., expenditure incurred in the
acquisition or construction of tangible and intangible assets such as land,
buildings, computer hardware, software and knowledge-based content. Since
the items of the aforesaid nature are not peculiar only to companies, the
treatment thereof should be the same as in the case of other businesses.

22
Guidance Note on Accounting by E-commerce Entities

64. An illustrative list of activities performed in website development is given
in the Appendix to this Guidance Note.

Rebates, Discounts, Gift vouchers, Loyalty and
other sales incentives

65. The accounting treatment of rebates, discounts and other sales
incentives depends upon their nature.

66. Under Companies (Accounting Standards) Rules, 2006, where an entity
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. This treatment is similar to that accorded to trade
discounts. Where the rebates, discounts and other sales incentives are
specific in relation to a particular customer, these should be shown by way of
deduction from the value of the turnover in the statement of profit and loss of
the e-commerce entity.

67. Other forms of rebate or discount, which are general in nature, should
be treated as a selling and marketing expense and charged separately in the
profit and loss account under Companies (Accounting Standards) Rules, 2006.
Where rebates, discounts and other sales incentives are in kind, an
appropriate estimate of the costs thereof should be made and treated in the
manner specified above.

Point and loyalty programmes

68. Point and loyalty programmes have varied features and may be
structured in different ways. In some cases, an e-commerce entity may sell
points to its business partners, who then issue the same to their customers
based on purchases or other actions. For example, an e-commerce entity may
have an arrangement with a retail store to issue reward points to the customers
of the retail store based on the minimum volume of purchases made by the
customers. The customers can redeem these points while purchasing
merchandise through the e-commerce entity’s application until a specified
period of time. In some cases, the e-commerce entity may itself award the
points in order to encourage its members to take actions that will generate
payments from business partners to the company.

69. There are several kinds of schemes or incentive programmes that are
used by retailers and based on the programmes currently used, these can

23
Guidance Note on Accounting by E-commerce Entities

broadly be classified into:

• Awards that entitle the holder to discounted/free goods or services
in the same website/mobile application

• Awards that the holders can use in affiliated chain of
websites/mobile applications, for discounted/free goods or
services

• More complex arrangements, which include award credits that
entitle the holder to discounted/free goods or services provided by
another entity (for example, purchases in one store earn discount
coupons that can be redeemed at a food outlet, or at a store of
another entity)

• Qualitative benefits such as favoured treatments/additional
facilities to club members

• Arrangements in which third party organisations provide service of
redeeming awards against goods or services of the issuing entity
or of others.

70. Loyalty programmes are not directly dealt with by Accounting Standard
(AS 9), Revenue Recognition. AS 9 defines revenue as:

“Revenue is the gross inflow of cash, receivables or other
consideration arising in the course of the ordinary activities of an
entity from the sale of goods, from the rendering of services, and
from the use by others of entity resources yielding interest,
royalties and dividends. Revenue is measured by the charges
made to customers or clients for goods supplied and services
rendered to them and by the charges and rewards arising from the
use of resources by them. In an agency relationship, the revenue
is the amount of commission and not the gross inflow of cash,
receivables or other consideration.”

Paragraph 6.1 of AS 9 deals with timing of recognition of revenue in case of
products and reads as follows:

“A key criterion for determining when to recognise revenue from a
transaction involving the sale of goods is that the seller has
transferred the property in the goods to the buyer for a
consideration.

24
Guidance Note on Accounting by E-commerce Entities

The transfer of property in goods, in most cases, results in or
coincides with the transfer of significant risks and rewards of
ownership to the buyer. However, there may be situations where
transfer of property in goods does not coincide with the transfer of
significant risks and rewards of ownership. Revenue in such
situations is recognised at the time of transfer of significant risks
and rewards of ownership to the buyer. Such cases may arise
where delivery has been delayed through the fault of either the
buyer or the seller and the goods are at the risk of the party at fault
as regards any loss which might not have occurred but for such
fault. Further, sometimes the parties may agree that the risk will
pass at a time different from the time when ownership passes.”

Paragraph 7.1 of AS 9 deals with timing of recognition in case of services and
reads as follows:

“Revenue from service transactions is usually recognised as the
service is performed, either by the proportionate completion
method or by the completed service contract method.”

71. AS 9 does not provide any specific guidance on accounting for customer
loyalty schemes. With greater refinements of accounting theories and
especially, after issuance of Ind AS, the accounting of sale of goods and
services under loyalty programmes is also refined. Under AS 9, such sales of
goods and services may be considered as multiple element transactions; initial
sale and future sales against redemption of the benefits under the loyalty
programmes (often referred to as “Deferment Model”).

72. However, many retailers in India do not treat transactions of sale of
goods or service under loyalty programmes differently from normal sales
without such loyalty programmes so far as revenue recognition is concerned.
Appropriate provision is made, as marketing expense, towards the cost of
meeting obligation arising under the loyalty programmes. This was also the
practise generally followed internationally (referred to as “Provision Model”).

73. Under Accounting Standards framework, both the Provision Model and
Deferment Model are prevalent in India for accounting of customer loyalty
programmes. Some e-commerce companies treat it as a single element
transaction and recognise revenue for the entire transaction at the time of
initial sale. However, since a further cost is expected to be incurred in future
with regard to the obligation to provide free/discounted goods or services, a

25
Guidance Note on Accounting by E-commerce Entities

provision is recognised towards the cost of such free/discounted goods or
services as marketing expense at the time of initial sale. Others treat such sale
of goods or services as multiple element transactions; one element being the
initial sale and another being the future sale at discounted price/free against
redemption of the loyalty programmes benefit. Accordingly, revenue relating
to the obligation towards award credit/future redemption of benefits under the
programmes is deferred and recognised in the period in which the obligations
are fulfilled.

74. While both the treatments are in line with the matching concept, they
lead to a difference in the timing of recognition of revenue and costs. Under
the first one, treating the transaction as a single element one, the total revenue
and total cost is recognised at the time of recognising the initial sale while
under the second one, treating the transaction as a multiple element one, both
revenue and costs relating to the loyalty programmes are recognised
subsequent to the initial sale when the related obligations are fulfilled.

75. View that is now emerging post issuance of Ind AS, that the Deferment
Model accounting is more appropriate. It is also consistent with the principles
of AS 9 on the basis that AS 9 prescribes recognition of revenue when and to
the extent that, goods and services have been provided to the customer. In
case of sale of goods and services which entitle the customer to points or
award scheme/benefits/ rights which can be redeemed in future for discounted
or free goods or services, the retailer has two obligations – firstly, to provide
the initial goods or services and secondly, to provide further goods or services
at a discounted price or even free of cost as and when customer redeems the
award/benefit of the programmes.

76. Accordingly, the consideration received is towards fulfilling two
obligations rather than just providing the initial goods or services.

77. Under AS 9, the Deferment Model being more refined one is preferred
model, though it does involve complex workings to arrive at the fair value of
the award credits/obligations to be fulfilled in future. This Model thus, requires
data for estimating the expected redemptions to establish patterns which may
not be readily available with a retailer especially, since e-commerce is
comparatively new in India. In case, reliable data is not available or the
estimation of fair value of award credits presents significant difficulties,
Provision Model may be used under AS 9 as an acceptable alternative.

78. Awards that entitle the holder to discounted/free goods or services in

26
Guidance Note on Accounting by E-commerce Entities

the e-commerce website/mobile application. The concept of bifurcating the two
elements of a transaction and accounting treatment for each element under
the Deferment Model is explained in the following illustration:

Example: Award credits – Deferment Model under AS 9

Entity A awards 80 points with each purchase of goods of ` 100. These
points can be exchanged for goods supplied by the entity. The customer
has a three year period over which he/she can use the credits. For every
1,000 points, goods with a retail sale price of ` 60 can be obtained. If
the entity provides these goods itself, its cost is ` 12. The Entity has
sold goods of ` 150 under the Scheme. It has thus, awarded 120 points
in connection with sale of goods of ` 150. In Year 1, the Entity expects
that 100 of these points will be redeemed. In Year 2, the Entity revises
its estimate of estimated redemption to 90 points. The actual redemption
is as under:

Year 1: 50 points redeemed

Year 2: 10 points redeemed

Year 3: 30 points redeemed or expired

Deferment Model

First of all, value of the Award Credits will need to be worked out. This
works out to ` 7.20 [(60*120/1000)]. However, since only 100 points are
expected to be redeemed, the fair value of the total award credits works
out to ` 6 (` 7.2 *100/120).

The accounting treatment for this will be as under:

At the time of initial sale

Cash/Bank Dr. 150 Cash received at the time
of sale
Deferred revenue (liability) Cr. 6
Fair value of the award
Sales Cr. 144 [7.2 *(100/120)]
At the end of year 1:
` 150-` 6

Since 50 points have been redeemed, the entity will recognise revenue
of ` 3 (50/100*` 6). ` 6 is the initial estimate of the fair value of the

27
Guidance Note on Accounting by E-commerce Entities

award which was deferred at the time of sale on the basis that 100 points
will be redeemed.

Deferred revenue (liability) Dr. 3 [50/100*` 6]
Sales Cr. 3

Correspondingly, as and when the points are redeemed, the entity will
book the cost incurred towards redeeming the points. The entity incurs
` 12 when it redeems 1000 points, accordingly, for 50 points the cost is
worked out to ` 0.60 i.e. (50/1000*12):

Cost of Goods Sold Dr. 0.60 [50/1000*` 12]
Inventory Cr. 0.60

Year 2:

During the second year, 10 points have been redeemed, bringing the
total points redeemed to date to 10+50 = 60. Since management now
expects a total of 90 points to be redeemed, it should recognise a
revenue of ` 4 i.e. (60/90*` 6). As ` 3 has already been recognised, the
entity recognises a further ` 1 of the revenue. The entries in year 2 will
be as follows:

Deferred revenue (liability) Dr. 1 Revenue to be
recognised till date: 60
points/90 points *` 6=
` 4 Less: recognised in
Year 1: ` 3.00 Balance:
` 1.00

Sales Cr. 1

Correspondingly, the entity incurs ` 12 when it redeems 1000 points,
accordingly, for 10 points the cost is worked out as (10/1000*12) which
is ` 0.12.

Cost of goods sold Dr 0.12 (10/1000*` 12)
Inventory Cr 0.12

28
Guidance Note on Accounting by E-commerce Entities

Year 3:

Since the remaining points are either redeemed or expired in the third
year, the balance of deferred revenue should be recognised in this year.
Since out of the total deferred revenue of ` 6, ` 4 has been recognised
as revenue in the earlier years, the balance of ` 2 of deferred revenue
is recognised in year 3. Further, if the balance points are not redeemed
and they expire, then there will be no corresponding cost. However, if
the balance points are redeemed, then the corresponding costs should
also be recognised as illustrated for year 1 and year 2.

Deferred revenue (liability) Dr. 2 Total deferred revenue: `
Sales 6.00 Less: recognised in
Year 1: ` 3.00 Less:
recognised in Year 2: `
1.00
Balance: ` 2.00

Cr 2

Accordingly, the impact of using the Deferment Model is that ` 6 out of
the revenue received in Year 1 is recognised over 3 year period in
proportion to the expected redemptions. The total revenue recognised
over the 3 year period continues to be ` 150. The related costs of
redemption are recognised correspondingly in the respective period
when the redemption occurs.

Provision Model under AS 9:

In contrast, under the Provision model, the entire revenue is recognised
at the time of initial sale, along with the entire expected cost of
redemption for which a provision is recognised:

Cash/Bank Dr. 150 Cash received at the time of
initial sale

Sales Cr. 150 Revenue recognised fully

Marketing expense Dr. 1.20 Expected cost of goods to be
used for redemption of 100
points: [` 12*100 points
/1000 points]

Provision for marketing 1.20

expense Cr.

29
Guidance Note on Accounting by E-commerce Entities

As and when the points are redeemed in the subsequent years, the
provision recognised as above is utilised. For example, in year 1, since
50 points are redeemed, provision for marketing expense is utilised as
follows:

Provision for marketing expensed. Dr. 0.60 (50/1000*` 12)

To Inventory Cr. 0.60

The difficult aspect in this process is the determination of the fair value
of the points/award credits. This is further illustrated in the following
example:

As mentioned above, this option is available under AS 9

Example: Awards credits – identification of fair value under AS

An electronic retailer sells a toy on its mobile application for ` 20. A
coupon entitling the bearer to a discount of ` 6 on a subsequent
purchase of the same type of toy is issued with each sale. Another
retailer sells the same toy for ` 18 without the coupon.

The e-tailer’s experience has been that for every two coupons issued,
one is redeemed. During a particular year, the e-tailer has sold 10 toys
with coupons.

In this case, the customer is purchasing both the toy and the coupon.

Therefore, revenue will be required to be allocated between the toy and
the voucher (coupon). This is done using fair values of each element.
The fair value of each voucher is worked out to ` 4 as under:

Normal sale price of the toy without voucher ` 18

Less: Sale price of toy using voucher (Retail price of ` 20 less ` 14
the face value of the voucher ` 6)

Redemption value of the voucher ` 4

This value is then adjusted for the proportion of vouchers expected to
be redeemed (50 per cent). Thus, the fair value of the Voucher works
out to ` 2 (` 4*50 %) and that of the toy to ` 18 (` 20 minus ` 2 being
the fair value of the voucher)

The accounting entry at the time of initial sale will be as under:

30
Guidance Note on Accounting by E-commerce Entities

Cash/Bank Dr 200 Cash received at the
time of sale (10 toys @
Sales Cr 180 ` 20 per toy)

Deferred Revenue (liability) Cr 20 Fair value of the toys*
` 18 per toy

Fair value of the
voucher (10 vouchers
@ ` 2 per voucher)

The amount of revenue recognised upon redemption of the vouchers is
based upon the Redemption Value of the vouchers.

Hence, when a single voucher is redeemed the accounting entry is:

Deferred Revenue (liability) Dr 4 Redemption Value of
each voucher

Cash/Bank Dr 14 Cash received at the
time of sale (Sale Price
` 20 minus ` 6 –
face value of the
voucher)

Sales Cr 18 Redemption Value of
voucher (` 4) + amount
received on sale (` 14)

Award Credits that the holders can use in stores within the same website/
mobile application or chain of website/ mobile application, for discounted/free
goods or services

79. The same principles under AS 9 as set out above in relation to award
credits entitling the holder to discounted/free goods or services in the same
website/ mobile application apply in this situation also except that the
determination of the fair value of the award credits, goods or services will need
to take into consideration the difference, if any, in the price at which the goods
or services are sold through different websites/mobile applications.

80. In case Provision Model is adopted under AS 9, the provision will have
to take into consideration the difference, if any, in the cost of goods or services
supplied through different websites/mobile applications.

31
Guidance Note on Accounting by E-commerce Entities

81. Award credits that are redeemable against discounted/free goods or
services provided by the issuer entity itself or for goods or services provided
by another entity.

82. There could be a reciprocal arrangement too whereby the issuing entity
redeems awards issued by the third party.

83. Such loyalty programmes may be administered by the issuer entity itself
or the obligation and/or administration may be transferred to third party.

The AS 9 accounting of self-administered programmes is illustrated below.

84. Where the customer can redeem awards issued by an entity at its own
website/ mobile application or at a third party website/ mobile application, the
entity retains the obligation for redemption till the point the customer redeems
the award. This is because the customer is free to redeem the points in either
own or third party website/ mobile applications.

85. In such cases, it may or may not be possible to estimate how many
points the customer is likely to redeem in own store and how many in third
party website/ mobile application. Normal assumption is that it is not feasible
to predict which of the websites/ mobile applications the customer will choose
for redemption and accordingly, it is presumed, for accounting purposes, that
the customer will redeem all award credit points in own website/ mobile
application. The accounting entries, in that case, will be same as explained
above at the time of initial sale. The entity accounts for the payments to be
made to the third party based on the contractual arrangement with the third
party.

86. On the other hand, if reliable estimate for redemption pattern or choice
of customers can be made based on past track record, the entity will account
for the points estimated to be redeemed in own website/ mobile application
applying principles explained above and will make provision for the amounts
to be paid to third party website/ mobile application based on the contractual
arrangement between the parties. This is explained in the Illustration below.

Example: Award credits redeemable by another entity – self
administration

Entity A awards 80 points with each purchase of goods of ` 100 through
its website/ mobile application. These points can be exchanged for
goods supplied by Entity A or Entity B. Entities A and B are not related
parties and are acting on a principal-to-principal basis. The customer

32
Guidance Note on Accounting by E-commerce Entities

has a three year period over which he/she can use the credits. For every
1,000 points, goods with a retail sale price of ` 60 can be obtained either
in Entity A or Entity B. If Entity A provides these goods, its cost is ` 12
and if they are provided by Entity B, Entity A will have to pay ` 40 to
Entity B. Entity A has sold goods of ` 150 under the Scheme. It has,
thus, awarded 120 points in connection with sale of goods of ` 150. In
Year 1, Entity A expects that 100 of these points will be redeemed of
which 60 will be redeemed in its own store and 40 will be redeemed in
Entity B. In Year 2, the Entity revises its estimate of estimated
redemption to 90 points of which 54 points are expected to be redeemed
in its own store and 36 points in Entity B. The actual redemption is as
under:

Year 1: 50 points redeemed – 30 points in Entity A and 20 points in
Entity B

Year 2: 10 points redeemed – 8 points in Entity A and 2 points in Entity
B

Year 3: 12 points redeemed in Entity A and balance 10 expired

Deferment Model under AS 9

First of all, value of the Award Credits will need to be worked out. Value
of 1000 points is ` 60 so, value per point is ` 0.06. Thus, value of 120
points works out to ` 7.20 [(60*120)/1000]. However, since only 60
points are expected to be redeemed in Entity A, the fair value of the total
award credits works out to ` 3.6 (` 7.2 *60/120). Since 40 points are
expected to be redeemed in Entity B, provision will have to be made for
payment to be made to Entity B for the 40 points expected to be
redeemed in Entity B.

The accounting treatment for Entity A for this will be as under:

At the time of initial sale:

Cash/Bank Dr 150.00 Cash received at the time of
sale

Deferred revenue Cr 3.60 Fair value of the award [7.2
*(60/120)]

Sales Cr 146.40 ` 150 – ` 3.60

33
Guidance Note on Accounting by E-commerce Entities

Marketing Expense 1.60 Amount to be paid to Entity
Dr B (` 40* 40/1000)

Provision for Redemption 1.60 Same as above

in Entity B Cr

At the end of year 1:

Since 30 points have been redeemed by Entity A, Entity A will recognise
revenue of ` 1.80 (30/60*` 3.6). ` 3.6 is the initial estimate of the fair
value of the award expected to be redeemed in Entity A which was
deferred at the time of sale on the basis that 60 points will be so
redeemed.

Deferred revenue Dr 1.80 (30/60*` 3.6)

Sales Cr 1.80

Correspondingly, as and when the points are redeemed, Entity A will
book the cost incurred towards redeeming the points. Entity A incurs `
12 when it redeems 1000 points, accordingly, for 30 points the cost is
worked out to ` 0.36 i.e. (30/1000*12):

Cost of Goods Sold Dr ` 0.36 (30/1000*` 12)
Sales Cr ` 0.36

Further, in respect of the points redeemed in Entity B, Entity A will have
to make payment to Entity B at the rate of ` 40 for every 1000 points
redeemed. As only 20 points have been redeemed, the payment by
Entity A to Entity B works out to ` 0.80.

Provision for Redemption in . 0.80 ` (40 * 20/1000)

Entity B Dr Amount paid to Entity
B against redemption
Cash/Bank Cr 0.80 of 20 points

Year 2

During the second year, 10 points have been redeemed of which 8
points are redeemed in Entity A and 2 points in Entity B. Thus, total
points redeemed to date by Entity A works out to 38 (30 + 8). Since

34
Guidance Note on Accounting by E-commerce Entities

management now expects a total of 54 points to be redeemed in Entity
A, it should recognise total revenue of ` 2.53 i.e. (38/54 * ` 3.60). Of
this, ` 1.80 has already been recognised, Entity A will recognise a
further ` 0.73 of the revenue. The entries in year 2 in the books of
Entity A will be as follows:

Deferred revenue Dr 0.73 Revenue to be recognised till
date: 38 points/54 points *`
3.60 = ` 2.53 Less:
recognised in Year 1: ` 1.80
Balance: ` 0.73

Sales Cr 0.73

Correspondingly, the entity incurs ` 12 when it redeems 1000 points,
accordingly, for 10 points the cost is worked out as (10/1000*12)
which is ` 0.12:

Cost of goods sold Dr 0.12 (10/1000*` 12)

Inventory Cr 0.12

Year 3:

Since 12 points are redeemed in Entity A and balance have expired
in the third year, the balance of deferred revenue should be
recognised in this year. Since out of the total deferred revenue of `
3.60, ` 2.53 has been recognised as revenue in the earlier years, the
balance of ` 1.07 of deferred revenue is recognised in year 3. Further,
there will be corresponding cost which entity incurs – that cost is ` 12
for 1000 points and accordingly, for 12 points, it works out to ` 0.144
(12/1000*12).

The accounting entries in books of Entity A in Year 3 will be as under:

Deferred revenue Dr 1.07 Total deferred revenue: ` 3.60
Less: recognised in Year 1: `
1.80 Less: recognised in Year
2: ` 0.73 Balance: ` 1.07

Sales Cr 1.07

Accordingly, the impact of using the Deferment Model is that ` 3.60
out of the revenue received in Year 1 is recognised over 3 year period

35
Guidance Note on Accounting by E-commerce Entities

in proportion to the expected redemptions. The total revenue
recognised over the 3 year period continues to be ` 150. The related
costs of redemption are recognised correspondingly in the respective
period when the redemption occurs.

So far as Entity B is concerned, it will account for sales as they take
place. It will recover part or no amount (depending on whether the
arrangement is for discounted goods/service or free goods/service)
from the customer and balance amount from Entity A.

If, however, the arrangement entered into with Entity A is onerous and
it expects to incur loss in the transaction, it should make provision for
the expected loss in accordance with AS 29.

Provision Model under AS 9

Under the Provision Model, Entity A will recognise the entire revenue
at the time of initial sale, along with the entire expected cost of
redemption for which a provision is recognised:

Cash/Bank Dr 150 Cash received at the time of
initial sale
Sales Cr 150
Revenue recognised fully
Marketing expense Dr 2.32
Cost of goods to be used for
redemption in own store (0.72)
+ amount to be paid to Entity B
(` 40 *40/1000) = 1.60

Provision for marketing 0.72 Expected cost of goods to be
used for redemption of 100
expense Cr points: [` 12*100 points/1000
points]

Provision for 1.60 Amount to be paid to Entity B
(` 40 *40/1000) = 1.60
redemption in Entity B

Cr

As and when the points are redeemed in the subsequent years, the
provision recognised as above is utilised. For example, in year 1,
since 30 points are redeemed, provision for marketing expense is
utilised as follows:

36
Guidance Note on Accounting by E-commerce Entities

Provision for marketing ` 0.36 (30/1000*` 12)
expense Dr

To Inventory ` 0.36
Cr

Accounting in situations where the issuer entity has transferred administration
to third party

87. In such cases, the issuer entity retains the obligation relating to the
scheme and the third party is engaged merely to act as a service provider to
facilitate the administration of the loyalty scheme.

88. Since obligation continues to remain with the issuer entity, the principles
explained above apply. The service fee of the third party for assistance in
administering the loyalty scheme is to be accounted for based on the
contractual arrangement between the entity and the third party.

Entity transfers the obligation of redeeming awards under the loyalty schemes
to a third party in its entirety

89. The third-party administrator who undertakes the obligation to redeem
awards usually enters into contractual arrangements with entities participating
in the scheme.

Normally, entities participating in such arrangements, act as both the issuing
entity (in pursuance of its own loyalty scheme) as well as a redeeming entity
(redeeming awards issued by other entities). The redeeming entity receives
consideration from the third-party administrator for undertaking such
obligation.

90. The following flow chart illustrates a third-party arrangement in which
Website A and Website B have entered into contractual arrangement with
Rewards Ltd. for administering reward schemes.

37
Guidance Note on Accounting by E-commerce Entities
Customer shops in Website A which issues 100 points worth ` 100 under
scheme of Rewards Ltd.

Website A passes the obligation to Rewards Ltd. at ` 98 thus earning an
income of ` 2

Customer chooses to redeem the points at Website B

Website B redeems 100 points by selling goods worth ` 100 to the
customer and intimates Rewards Ltd. of the redemption

Rewards Ltd. compensates Website B by paying ` 95

Income of Rewards Ltd. = ` 3 (` 98 - ` 95)
91. Rewards Ltd has similar arrangements with multiple website. The entity
recognises the revenue in full on sale of goods/services and does not defer
any revenue as there are no further obligations to be fulfilled by the entity. The
expense/income on account of the transfer of obligation to the third-party
administrator, as per the agreement, are separately accounted for. The
following illustration explains the accounting treatment in such cases.

Example: Awards obligation transferred to third party in its entirety
Rewards Ltd. runs a loyalty card scheme independently from any
electronic retailers through their mobile applications/ website. The
customer holds a loyalty points card which is issued by Rewards Ltd.
and allows the customer to earn points at a given list of retailers and
use points at other electronic retailers.

38
Guidance Note on Accounting by E-commerce Entities

The face value of the point issued is ` 1 and for each point issued, the
issuing electronic retailer, Website A, will pay ` 0.98 to Rewards Ltd.
and in doing so will earn ` 0.02 of commission income. Once Website
A has paid Rewards Ltd., it has no further obligation to the customer.

When another electronic retailer – Website B redeems points with a face
value of ` 1, it will receive compensating cash from Rewards Ltd.
amounting to ` 0.95. Rewards Ltd.’s margin is the difference between
the redemption price and the issue price. Where either Website A or
Website B both issue and redeem points, there is no netting of cash
flows; cash is paid to Rewards Ltd. for points issued, and cash is
received from Rewards Ltd. for points redeemed. The accounting for
such a scheme in the books of Website A is as follows:

When the retailer makes a sale of ` 10, it issues points with face value
of ` 1:

Cash/Bank Dr 10 Cash received at the time
Sales Cr 9 of sale
Other Income Cr 0.02
Revenue attributed to
sale of product

Difference between
obligation of ` 1 less the
amount at which the
liability is passed on to
Rewards Ltd. ` 0.98 = `
0.02. As Website A has
no further obligations, it
can recognise this
income at the time of
initial sale

When the risks and rewards associated with the points are
immediately passed to Rewards Ltd., the liability is offset:

Liability Dr 0.98 Money paid to Rewards
Cash/Bank Cr 0.98 Ltd. for offsetting the
liability.

39
Guidance Note on Accounting by E-commerce Entities

The accounting for redemption in the books of Store B is as follows:

When the points are redeemed, the redeeming retailers will recognise
the revenue made by the points with a face value of ` 1 at ` 0.95:

Receivable from Rewards 0.95 Money receivable from

Ltd Dr Rewards Ltd on

redemption of voucher

as per the contractual

arrangement with

Rewards Ltd.

Sales Cr 0.95

92. The expenses relating to launching and promoting loyalty schemes
should be recognised in the profit and loss account as and when incurred.

Accounting for gift cards/coupons

93. The use of gift coupons and gift cards is common in the electronic retail
industry. The gift cards or coupons are typically sold for cash and may be used
by customers to obtain products or services in the future up to a specified
monetary value. The amount of gift certificates that are forfeited is commonly
referred to as breakage. Breakage will typically result in the recognition of
income for a retailer; however, the timing of recognition depends on expected
customer behaviour and the legal restrictions in the relevant jurisdiction.

Equity Based Consideration

94. Many e-commerce companies use equity-based consideration to fund
expenditures as cash is not an available alternative to attract new business
relationships, alliances, or supplier agreements.

95. Under Companies (Accounting Standards) Rules, 2006, as amended,
there is no accounting standard that specifically deals acquisition of goods or
services from vendor in exchange of equity instruments as consideration.
However, ICAI’s Guidance Note (GN) on Accounting for Share-based
Payments deals with share-based payment transactions, including those
towards acquisition of goods or services from vendor. The Guidance Note is
similar to Ind AS 102 with regards to share-based payment transactions with
non-employees (for example, customers or vendors). Under this GN, all equity-
settled share based payment transactions with non-employees are normally

40
Guidance Note on Accounting by E-commerce Entities

measured using a ‘service date model’ (i.e. the transaction is recorded at the
fair value of the goods or services received at the date they are received).

96. Paragraph 22 and 23 of the GN on Accounting for Share-based
Payments states as follows:

“22 To apply the requirements of paragraph 17 to transactions with
parties other than employees, there shall be a rebuttable
presumption that the fair value of the goods or services received
can be estimated reliably. That fair value shall be measured at the
date the entity obtains the goods or the counterparty renders
service. In rare cases, if the entity rebuts this presumption because
it cannot estimate reliably the fair value of the goods or services
received, the entity shall measure the goods or services received,
and the corresponding increase in equity, indirectly, by reference
to the fair value of the equity instruments granted, measured at the
date the entity obtains the goods or the counterparty renders
service.

23 In particular, if the identifiable consideration received (if any)
by the entity appears to be less than the fair value of the equity
instruments granted or liability incurred, typically this situation
indicates that other consideration (ie unidentifiable goods or
services) has been (or will be) received by the entity. The entity
shall measure the identifiable goods or services received in
accordance with this Standard. The entity shall measure the
unidentifiable goods or services received (or to be received) as the
difference between the fair value of the share-based payment and
the fair value of any identifiable goods or services received (or to
be received). The entity shall measure the unidentifiable goods or
services received at the grant date. However, for cash-settled
transactions, the liability shall be premeasured at the end of each
reporting period until it is settled in accordance with paragraphs
44-47.”

97. For equity-settled share-based payment transactions, the entity shall
measure the goods or services received, and the corresponding increase in
equity, directly, at the fair value of the goods or services received, unless that
fair value cannot be estimated reliably. If the entity cannot estimate reliably the
fair value of the goods or services received, the entity shall measure their

41
Guidance Note on Accounting by E-commerce Entities

value, and the corresponding increase in equity, indirectly, by reference to1
the fair value of the equity instruments granted. An entity shall measure the
fair value of the services received by reference to the fair value of the equity
instruments granted, because typically it is not possible to estimate reliably the
fair value of the services received. The fair value of those equity instruments
shall be measured at grant date.

98. In case of share-based payment transactions with parties other than
employees, there shall be a rebuttable presumption that the fair value of the
goods or services received can be estimated reliably. That fair value shall be
measured at the date the entity obtains the goods or the counterparty renders
service. In rare cases, if the entity rebuts this presumption because it cannot
estimate reliably the fair value of the goods or services received, the entity
shall measure the goods or services received, and the corresponding increase
in equity, indirectly, by reference to the fair value of the equity instruments
granted, measured at the date the entity obtains the goods or the counterparty
renders service.

Inventory accounting

99. In the initial set years, an e-commerce entity may cater to retail
customers and often carry significant inventory whilst focussing on increasing
their revenues through aggressive customer acquisition. However, one of the
key challenges for operational success is their inventory management process
and ability to effectively manage loan working capital. Such companies may
build up inventory in the hope to achieve higher volumes, which is expected to
compensate for the low margin on sales. A constant change in the product
portfolio and freebies could lead to challenges in the management of the
inventory records.

100. If an entity does not have a strong control environment to monitor its
inventory, then such an entity may face the issue of write-down of inventory
balances as at the reporting date. Further, ascertaining cost versus net
realisable value, whichever is lower, becomes a challenge as the margins on
such inventory portfolios are slim, which may add to the inventory write down
provision.

Therefore, it becomes extremely important to maintain, monitor and control
inventory for an effective inventory management.

42
Guidance Note on Accounting by E-commerce Entities

101. Often the biggest impediment in the sector is unreliable third party
logistics and delays due to poor surface transport. It is important to have a well
drafted agreement with logistics providers as the following accounting aspects
could have an impact:

• Accounting for revenue

Certain logistics provider take over the risk and rewards when such
goods are collected from the companies’ warehouses, which could
remove the delay and hassle of evidencing delivery from revenue
recognition.

• Mode of payment

Certain logistics provider collect cash from the respective customers
and aggregate the same and deposit it into the entity’s bank account,
by which the entity could mitigate its risk associated with handling the
cash.

• Cost recognition

There are various ways a logistics provider is paid, per piece basis,
monthly based on volumes, etc. It is critical that companies understand
such arrangements as the related volume discount earned or monthly
charges paid would need to be accounted appropriately.

102. Many logistics provider also provide warehousing and inventory
management. It is important for companies to have an effective control and
monitoring mechanism when the goods are with a third party.

Advertisement cost

103. To get customers to visit an e-commerce site and make a purchase
involves heavy cost due to advertisement and marketing. Considering such
advertisement and marketing costs are significant, the accounting challenge
around such expense is that most companies would like to defer such costs in
their financial statements based on the commercial view that these costs may
have enduring benefits to the entity. However, advertisement expenses are
expensed as incurred.

Cash handling

104. Cash handling is one critical issue that affects most of the e-commerce
companies. A lot of companies allow customers to pay cash on delivery.

43
Guidance Note on Accounting by E-commerce Entities
105. Handling of large volumes of cash, which is inherently susceptible to
pilferage, can be a constant challenge. It can, however, be curtailed by
effective monitoring and segregation of duties. Many companies may institute
controls to ensure cash deposits are made daily with effective receipts and
checklists. The aid of an effective internal audit would be critical. The entity
could also institute simple but effective steps like surprise cash counts,
expanding cash insurance, etc. for controlling this risk.

Disclosure

106. Besides the disclosure of the significant accounting policies as per the
requirement of Accounting Standard (AS) 1, ‘Disclosure of Accounting
Policies’, the bases for arriving at the fair values in respect of the following
should be disclosed in the financial statements of an e-commerce entity:
(i) Different elements comprising a multiple arrangement.
(ii) Advertising barter transactions.
(iii) Equity based consideration.
In addition, the entities shall provide the disclosures as per the other
accounting standards.

44
Guidance Note on Accounting by E-commerce Entities

Appendix

Illustrative List of Activities Performed at Planning Stage

1. Develop a business, project plan, or both. This may include identification
of specific goals for the website (for example, to provide information, supplant
manual processes, conduct e-commerce, and so forth), a competitive analysis,
identification of the target audience, creation of time and cost budgets, and
estimates of the risks and benefits.

2. Determine the functionalities (for example, order placement, order and
shipment tracking, search engine, e-mail, chat rooms, and so forth) of the
website.

3. Identify necessary hardware (for example, the server) and web
applications. Web applications are the software needed for the website’s
functionalities. Examples of web applications are search engines, interfaces
with inventory or other back-end systems, as well as systems for registration
and authentication of users, content management, usage analysis, and so
forth.

4. Determine the technology necessary to achieve the desired
functionalities. Factors might include, for example, target audience numbers,
user traffic patterns, response time expectations, and security requirements.

5. Explore alternatives for achieving functionalities (for example, internal
versus external resources, custom-developed versus licensed software, entity
owned versus third-party hosted applications and servers).

6. Conceptually formulate and/or identify graphics and content.

7. Invite vendors to demonstrate how their web applications, hardware, or
service will help achieve the website’s functionalities.

8. Selection of external vendors for consultants.

9. Identify internal resources for work on the website design and
development.

10. Identify software tools and packages required for development
purposes.

11. Address legal considerations such as privacy, copyright, trademark and
compliance.

45
Guidance Note on Accounting by E-commerce Entities

Illustrative List of Activities Performed at Website
Development Stage

1. Acquire or develop the software tools required for the development work
(for example, HTML editor, software to convert existing data to HTML form,
graphics software, multimedia software, and so forth).

2. Obtain and register an Internet domain name.

3. Acquire or develop software necessary for general website operations,
including server operating system software, Internet server software, web
browser software, and Internet protocol software.

4. Develop or acquire and customise code for web applications (for
example, catalogue software, search engines, order processing systems,
sales tax calculation software, payment systems, shipment tracking
applications or interfaces, e-mail software and related security features).

5. Develop or acquire and customise database software to integrate
distributed applications (for example, corporate databases, accounting
systems) into web applications.

6. Develop HTML web pages or develop templates and write code to
automatically create HTML pages.

7. Purchase the web and application server(s), Internet connection
(bandwidth), routers, staging servers (where preliminary changes to the
website are made in a test environment), and production servers (accessible
to customers using the website). Alternatively, these services may be provided
by a third party via a hosting arrangement.

8. Install developed applications on the web server(s).

9. Initial creation of hypertext links to other websites or to destinations
within the website. Depending on the site, links may be extensive or minimal.

10. Test the website applications (for example, stress testing).

Illustrative List of Activities Performed at Graphics and
Content Development Stages

1. Create initial graphics for the website. Graphics include the design or
layout of each page (that is, the graphical user interface), colour, images and
the overall ‘look and feel’ and ‘usability’ of the website. Creation of graphics

46
Guidance Note on Accounting by E-commerce Entities
may involve coding of software, either directly or through the use of graphic
software tools. The amount of coding depends on the complexity of the
graphics.
2. Create content or populate databases. Content may be created or
acquired to populate databases or web pages. Content may be acquired from
unrelated parties or may be internally developed.
3. Enter initial content into the website. Content is text or graphical
information (exclusive of graphics described in (1) above) on the website which
may include information on the entity, products offered, information sources
that the user subscribes to, and so forth. Content may originate from
databases that must be converted to HTML pages or databases that are linked
to HTML pages through integration software. Content also may be coded
directly into web pages.

47
Guidance Note on Accounting by E-commerce Entities

Glossary

E-commerce Electronic commerce
E-tailer Electronic retailer
B2B Business to business
B2C Business to consumer
C2C Consumer to consumer
C2B Consumer to business
HTML Hypertext Markup Language

48