Worked Solution
✓ VerifiedOpinion of the Accountant: Not Correct
The accountant's view that ₹1250 lakhs of income should also be recognized in the Profit & Loss Account, merely because an equivalent provision for expense has been made, is not tenable under the applicable Accounting Standards.
Relevant Standard — AS 9: Revenue Recognition
As per AS 9 (Revenue Recognition), issued by the Institute of Chartered Accountants of India, revenue from service transactions should be recognized when the following conditions are satisfied:
(i) The amount of revenue can be measured reliably.
(ii) It is reasonably certain that the ultimate collection will be made.
(iii) The costs incurred or to be incurred can be measured reliably.
In the given case, the contract with clients is on a cost-plus basis, where billing is expressly done on actual payments made to employees, allocated to jobs based on hours booked. Since no actual payment has been made to the employees in respect of the pay revision (only a provision on estimated basis has been created), the contractual condition for raising a bill — and consequently recognizing revenue — has not been fulfilled.
Further, since the Pay Revision Commission's report is yet to be submitted, the exact amount of the liability is uncertain. The provision of ₹1250 lakhs is only an estimate. Recognizing income of the same amount would mean booking revenue that is neither determined nor contractually due, which is contrary to AS 9.
On the Matching Concept
The Matching Concept (also referred to in the Framework for Preparation and Presentation of Financial Statements) states that expenses should be matched against the revenues they help generate in the same period. It is a principle for expense recognition — it does not create or accelerate revenue recognition. Matching works from revenue to expense, not the other way around.
The accountant has applied the matching concept in reverse — arguing that because an expense (provision) has been recognized, corresponding income must also be recognized. This is a misapplication of the concept. The booking of a provision for pay revision is driven by the Prudence Concept (recognizing known liabilities even if their amount is uncertain), not by any obligation to simultaneously recognize revenue.
Correct Treatment
The treatment adopted by the company is appropriate:
(i) Provision of ₹1250 lakhs is correctly recognized as an expense in 2014-15 on estimated basis — consistent with prudence.
(ii) No corresponding income should be recognized until the actual payment is made and billed to the client as per the contract terms.
(iii) The disclosure through notes to accounts adequately informs users of financial statements that the reimbursable amount will be billed when actual payment is made.
Conclusion: The opinion of the accountant is not correct. Recognizing ₹1250 lakhs as income in the P&L on the basis of a mere provision — without actual payment or a valid billing event — would violate AS 9, which requires revenue to be recognized only when it can be measured reliably and collection is reasonably certain. This is not an understatement of profit; rather, it reflects faithful application of AS 9 and the Prudence Concept.
Write it like this
1The skeleton
- State the verdict in line 1 — write 'The opinion of the accountant is not correct' before anything else; examiners award the conclusion mark upfront and won't hunt for it later.
- Cite AS 9 with its full name — write 'AS 9: Revenue Recognition' and immediately state its three conditions (measurable, reasonably certain collection, costs measurable); this single paragraph earns the 'standard application' marks.
- Tie the facts to the contract clause — explicitly say 'billing is on actual payment; no actual payment has been made; therefore the contractual trigger for revenue has not occurred'; this is where most marks are allocated because it shows you applied the standard, not just quoted it.
- Demolish the matching concept argument in its own paragraph — say matching works from revenue to expense, NOT expense to revenue; one crisp sentence calling it a 'misapplication' signals examiner-level understanding and separates you from average answers.
- Contrast Prudence vs Matching — state that the provision is driven by the Prudence Concept (recognizing estimated liabilities), which is completely separate from any obligation to recognize income; this shows conceptual clarity examiners love.
- Close with a two-point correct treatment — bullet (i) provision correct, bullet (ii) income not to be recognized until actual payment and billing; structured closure signals a complete answer and protects partial marks if earlier paragraphs were weak.
2Examiner-rewarded phrases
3Common trap
Heads up — almost everyone writes a long paragraph on what matching concept IS, instead of directly calling out that the accountant has applied it in reverse. That flip — expense recognized therefore income must be recognized — is the exact error ICAI wants you to identify; if you only explain matching without saying it's being misapplied here, you lose the core analytical marks on this question.