The Institute of Chartered Accountants of India (Icai) has issued guidelines for accounting of income by dotcom companies - online content providers and electronic commerce companies - which when applied by these entities will give a truer picture of their earnings.

E-commerce ventures of traditional brick and mortar companies will also be required to follow the guidelines when accounting for income from net-based activities.

The guidelines, which will become applicable with effect from April 1, '01, require dotcom companies to present then earnings based on net revenue, rather than gross revenue, and defer certain income over a period of time on a systematic basis. The guidelines do not specify any methodology to calculate valuation of a dotcom. However it is implicit that the institute does not approve of the practice of using total turnover for such valuations.

According to Icai president N D Gupta, this is the first attempt anywhere in the world to issue comprehensive guidelines to calculate earnings of dotcom companies. The US accountants bodies have issued guidelines on a limited basis, he said.

The Icai guidelines have been issued as a monograph for the moment. It may be reissued as a guidance note or even an accounting standard in a year or so, after it is fine-tuned on the basis of comments and suggestions received from the institute's members. Mr Gupta said, these accounting guidelines had been drafted at the instance of the Securities and Exchange Board of India (Sebi) which is working towards improving disclosure by companies. Several recommendations of the Y H Malegam sub-committee on disclosure have also been incorporated into the monograph, he added.

The monograph issued by the research committee of the institute deals with accounting treatment for membership and subscription fees, income from merchandising activities, advertising and other services and costs incurred by the dotcom company such as website development cost. It notes the websites/dotcom companies charge membership or registration fee - which could be refundable or non-refundable from subscribers to avail services offered by it. On this, the monograph states that treatment of non-refundable fees as revenue on its receipt will not be appropriate in instances where delivery of the product or service does not represent culmination of the revenue earning process. It adds, “revenue earning process is completed by performance of specified actions as per the terms of the arrangement, not simply by originating a revenue generating arrangement.” Where a subscriber to a website is required to pay for products or services, in addition to the initial membership fee such subscription fee will have to be capitalised and only revenue earned from offering the product or service may be recognised as earnings.

If the non-refundable fee entitles members to use the service for an indefinite period, the monograph states, revenue will be earned as and when the products/services are provided. This would, therefore, require the dotcom company to defer the fees as earned over a period of time which would not be less than five years. If, however, the member is entitled to use the service for a specified period of time, which may be less than five years, the fees could be recognised as revenue over such specified periods.

If the fee is refundable, subject to the subscriber fulfilling certain conditions, it cannot be considered as revenue on receipt. The fees can be accounted for as on accounting for income from distribution or sale of third-party products and services. The monograph states that if the dotcom company acts as an agent or a broker, ie, brings the buyer and seller together without assuming any risks, only service charges thus earned should be treated as revenue. On the other hand, if the dotcom acts as the principal, assumes the risks and rewards of ownership, then revenues and related costs could be considered on a gross basis. On income from banner advertising on the website, the monograph states, where the agreement between the dotcom company and advertiser does not carry conditions such as minimum guaranteed impressions, such revenue could be recognised on a straight line basis over the time the banner is to be hosted.