With the development of IT industry there is huge scope for growth not in the IT industry but in all other industries too and the growth of E-Commerce has revolutionized the way of conducting business. The buyers and the sellers are a mere click-of-the-mouse away. Number business organization already starts fructifying their business by using IT & E-commerce and the Concept of DOT-COM companies emerges out.

DOT-COM companies: I describe it in most simple language, “companies who sell their product or services online via sites.”

Types of DOT-COM companies

1. On-line content companies
2. Internet commerce companies

1. On-line content companies:

Focus on the content sites, I.e. the Internet sites that provide Following as their main business

1. News
2. Information
3. Knowledge
4. Internet Navigation Services and
5. Reference Guide Information

They publish, provide or present proprietary, advertising, and/or third party content. Basically they provide information. Examples of content sites include wikipedia.org, Google Search etc.

2. Internet commerce companies

Sell their products and services over the websites on the Internet.

On the basis of transactions types, we can classify sites as follow:

1. Business-to-Business (B2B),
2. Business-to-Consumer (B2C),
3. Consumer-to-Consumer (C2C),
4. Consumer-to-Business (C2B).

1)      Business-to-Business (B2B):

Provide the platform for different businesses to get their deal done. Transactions take place only between the industrial manufacturers, wholesalers or retailers for purchase and sale of products. Special features of these transactions are

• High volumes per customer,
• Lesser number of customers,
• Very secured payment systems,
• Privacy of information, etc.

Examples of sites in this category are indiaconstruction.com, clickforsteel.com and seekandsource.com.

2)      Business-to-Consumer (B2C):

Sell products or services directly to consumers. A large number of Dot-Com companies fall under this category. Special features of these transactions are

• Low volumes per consumer
• Large number of consumers

Examples of sites in this category are rediff.com, jaldi.com, indiatimes.com, zipahead.com, and fabmart.com.

 3)      Consumer-to-Consumer (C2C):

Sites enable consumers to buy and sell from each other through auction or other similar arrangements. Examples of sites in this category is olx.com ect.

 4)      Consumer-to-Business (C2B):

Sites enable consumers to set prices and business enterprises bid to offer products and services. Examples of sites in this category are razorfinish.com and priceline.com.

A. Revenue Recognition:

The Type of income:

1. Membership and subscription fee;
2. Merchandising activities Income;
3. Advertising services Charges
4. Other services like web-hosting, content selling, etc.

 1.    Membership and subscription:

To avail of the services provided by websites, consumers are usually required to pay an amount as membership fees or subscription charges.

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 and some services may be made available only on payment of an additional fee.

The membership/registration fees may fall in the following categories:

1)      Non-refundable fees

1. that entitle a member to use the services of the website by making payment for all services separately;
2. that entitle a member to use the services of the website indefinitely without making any further payment for use of services;
3. that entitle a member to use the services of the website for a specified period of time;

 2)      Refundable Fee

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;

 3)      Periodic membership/subscription fees:

1. Monthly,
2. Quarterly,
3. Annual or
4. Such other basis.

Revenue Recognition:

Point 1(a). Where all products or services are to be separately paid for apart from the initial membership fee, the initial membership fee is of the nature of an entrance fee which should be capitalised and revenue from rendering of services or supply of products should be recognised on the basis specified in GAAP.

 Point 1(b). Non-refundable fees that entitle a member to use the services of the website indefinitely revenue should be recognised as revenue over a period of not less than five years, 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.

 Point 1(c). When company provides services for periodic subscription, the revenue in respect of non-refundable fees to be recognised on the systematic basis which should not exceed the corresponding periodic subscription.

 Point 2. Fee refundable to members subject to fulfilment of certain conditions (for example, a stipulated volume of usage within a specified period, etc.),

The amounts received from customers should be credited and retained in a liability account such as ‘Customers Refundable Fees Account’ and the revenue from such transactions should be recognised only when it becomes reasonably certain that conditions would not be fulfilled.

 Point 3. 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 established principles of accrual accounting.

2.  Merchandising activities:

Revenue can be recognised on gross amount received and booking related cost of sales or to recognise the revenue on net basis, similar to commission.

 To recognise revenue following fact should be considered whether the dot-com company:

1. Acts as a principal in the transaction, i.e. first purchase a product from market and sell them to consumer who visit their site or
2. Acts as an agent or broker for sale of goods or rendering of services, i.e., does not purchase products to sell but just provide the platform to seller to sell their product and receive commission on sale.

 Where a dot-com company acts as

1. Principal: Revenues and the related costs should be recognized on a gross basis.( i.e. sale value of product as revenue and cost of purchase of product as cost of sale)
2. An agent: only the service charges are booked as revenue, similar to commission.

 Auctions:

Some dot-com companies host auction sites as part of their on-line activities where users can purchase or sell goods or services. The dot-com company usually earns revenues through two ways:

1. Up-front (Listing) fees
2. Transaction-Based fees.

1.  Listing Fees: is collected by dot-com companies at the time a seller registers for a listing for a specified period of time and from purchaser 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.
2.  Transaction Fees: is collected for facilitating the transaction and are usually based on a percentage of the revenue earned by the seller from the on-line sale. Such fees should be recognised as revenue by the dot-com company 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 Charges:

On-line products selling usually charge shipping and handling charges from customers and some companies display these charges separately whereas some do not, in invoice. These charges may or may not be a direct reimbursement of the costs incurred by company.

 To determining accounting treatment, following facts should be considered whether-

1. The invoiced raised on composite rate including shipping and handling charges or
2. Shipping and handling charges are recovered separately

1. 1. As an absolute amount or
   2. As a percentage of the sale value

By showing them separately in invoice.

Accounting Treatment and Revenue Recognition:

1. If composite invoice is raised, revenue should be recognized on gross amount receipt basis provided a clear distinction cannot be made between the product value and the shipping and handling charge
2. If such charges are recovered as an absolute amount or as a percentage of sale value by showing them separately
   1. Then shipping and handling charges should not be included in sales revenue but recorded separately as an income and the actual cost incurred in respect thereof should be recognised as an expense in statement of profit and loss account.

If these charges are clearly a reimbursement by the buyer for 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.

Multiple element arrangements:

A multiple element arrangement generally exists where a dot-com company 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.

 Accounting Treatment and Revenue Recognition:

company should unbundle the separate elements of the contract and specific fair values in respect every component for which sufficient company-specific objective evidence of fair values are available, i.e., what the company would have received if it sold each item/ service separately to unrelated parties.

 For example, company agree to host another company’s website and also provide web maintenance service for a fixed fee of Rs.15 lakh for a term of one year and six months, respectively. If the dot-com company has evidence that in its recent transactions, it has charged separate fees for web hosting and web maintenance of Rs.12 lakh for one year and Rs.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., Rs.10 lakh from web hosting over one year and Rs.5 lakh as revenue from web maintenance services over a period of six months.

 Note: there is no need to unbundle multiple elements of arrangements if the periods over which revenues would be recognized are the same for every individual elements of the arrangement.

In the absence of sufficient company-specific objective evidence of fair values for the allocation of revenue between various elements, company should defer recognition of the entire revenue from the contract until

1. Sufficient company-specific objective evidence comes into existence, or
2. All elements of the arrangement are delivered,

Whichever is earlier.

In the latter case, the composite amount is recognised as revenue on delivery of all elements of arrangement. And associated costs related to such deferred revenues should also be carried forward until revenues recognised in the financial statements.

 3.  Advertising services

One of the principal sources of revenue of dot-com companies is

1. Sale of Banner advertisements: are usually hosted for a short duration on websites.
2. Sponsorship advertisements: contracts have longer terms (in time) than banner advertising contracts and also involve more service integration.
3. High profile promotional sponsorships: are typically focused on a particular event, such as any particular show or lotteries which are one time shows which require immediate and large public attention.

There are number of ways contract can be made for advertisement by Dot-Com companies some of most common form of agreements are as follow:

1. Click-throughs Basis: dot com company charge customer on the basis of clicks on the banner or advertisement by visitors of site.
2. Time Basis: This is straight time basis i.e. Rs. XX for X months
3. Impression Basis: Number of time banner or advertisement appears on the site.

Revenue Recognition:

1. Case 1. Revenue should be booked on the number of clicks-through. I.e. if company charges Rs. 1000 for 500 clicks and upto year end total clicks made by visitors are 250 then only Rs. 500/- should be booked as revenue.
2. Case 2. Time Basis, revenue should be booked on straight-line basis over the period for which the banner is to be hosted on dot-com companies site.
3. Case 3. Impression Basis, revenue should be booked as in case 1 but the only difference is here we use number of impression instead of number of clicks.

Unless otherwise another systematic and rational basis of revenue recognition which is more representative of the services rendered is evidenced.

 Advertising barter transactions

 Sometimes Dot-com companies entered into a contract with each other, in which they exchange rights to place advertisements on each others’ websites or web pages. (It’s just like “tu mera bai main tere bai” wali condition.)

 Revenue determination from advertising barter transactions

Consideration from barter trisection should be equal to fees charged by Dot-com company within six months for similar transactions provided that parties are not related(unrelated buyers) and consideration is fair value (the price at which the seller is willing to sell and the buyer is will to buy) and all other economic circumstances are same.

 If economic circumstances have changed in last six months and transactions are not representative of current fair value for the advertising surrendered, then a shorter, more representative period should be used. It is inappropriate to consider cash transactions subsequent to the barter transaction to determine fair value.

 Similar Transactions Means: media must be same and within the same advertising vehicle (for example, same publication, same website, or same broadcast channel) as the advertising in the barter transaction and the characteristics of the advertising space surrendered for cash must be reasonably similar to that being surrendered in the barter transaction with respect to:

• Circulation, exposure, or saturation within an intended market;
• Timing (time of day, day of week, daily/weekly, 24 hours a day/ 7 days a week, and season of the year);
• Prominence (page on website, section of periodical, location on page, and size of advertisement);
• Demographics of readers, viewers, or customers;
• Duration (length of time for which the advertisement will be displayed).

 Note: Where, reliable estimates of fair value are not available when company should not recognise revenue and the associated costs involved in barter transactions.

 4.  Other services

Revenue from maintenance of websites including web hosting

Dot-com companies may also earn revenue from hosting websites for their customers, maintenance of the customers’ websites or providing such other services.

Revenue Recognition:

Revenue should be recognized 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

Some dot-com companies maintain websites which contain text or other material which can be sold as content for a price and downloading facility of such content is available to the purchaser only.

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 recognition, the content should generally be 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 dot-com company should determine the time at which the delivery of the content is considered to be complete and recognize the corresponding revenue. Usually it is the time when content is downloaded.

B. Recognition and Measurement of Costs

Accounting for website development costs

The website development costs of a new company should be accumulated, along with other costs incurred up to the time the website is first launched for the use of general users and shown as deferred revenue expenditure under the head ‘Miscellaneous Expenditure’.

 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.

 It is recommended that such accumulated cost should be mortised on a systematic and rational basis, over a period not exceeding 2 years after the website is first launched for the use of general users.

 And all other costs incurred, including those for development of new websites, after the website is first launched for the use of general users should be treated as expensed in the period in which they are incurred as usual.

 Rebates, discounts and other sales incentives:

Number of time we have seen sale on website or in our local market by showing interesting slogans like “loot lo offer”, “mala maal sale” or Discount upto 50% etc.

 These type of sale have special type of treatment and should be considered carefully for accounting purposes as all these rebates, discounts and other sales incentives depends upon their nature.

 When a dot-com company offers

1. rebates or
2. introductory offers at heavily reduced prices
3. 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 dot-com company.

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. 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 programs

Now a days it is common practice by dot-com companies to launch Point and loyalty programs have varied features and structures. Like, in some cases, a dot-com company may sell points to its business partners, who then issue the same to their customers based on purchases or other actions.

For example, a dot-com company may arrange with a store to issue reward points to the customers of the store based on the minimum volume of purchases made by the customers. The customers can exchange these points with the dot-com company for use of the dot-com company’s website for a specified period of time and in some cases, the dot-com company may itself award the points in order to encourage its members to take actions that will generate payments from business partners to the company.

The following accounting treatment should be adopted for the costs incurred by a dot-com company related to incentives under point and loyalty programs:

1. Where the incentives under a point and loyalty program are specific in relation to a particular customer, the cost of providing the incentives should be shown by way of deduction from the value of the turnover in the statement of profit and loss of the dot-com company and if incentives are in kind, an appropriate estimate of the costs thereof should be made.
2. If incentives under a point and loyalty program are general in nature, i.e., they are not related to specific customers then a general provision should be made in the statement of profit and loss of the dot-com company based on an appropriate estimate of the costs.

Disclaimer:This write up is intended to express the Authors understanding and to start academic discussion on the subject discussed in above write up.It should not be considered as professional advice. Readers are advised to refer relevant provision of law before applying or accepting any of the above mentioned views.Author accepts no responsibility whatsoever and will not be liable for any losses, claims or damages which may arise because of the contents of this write up.