Accounting for E-commerce Business - 1 | Financial Analysis and Reporting - B Com PDF Download

Overview

Introduction

Electronic commerce (e-commerce) has become a buzzword for businesses over the past few years, with increased awareness about the use of computer and communication technologies to simplify business procedures and increase efficiency.  E-commerce is more than a technology, it is a business model built around the application of information and communication technologies to cover any aspect of the value chain for products and services. Perhaps the clearest indication of the growing importance of e-commerce in the global economy is the rapidity with which internet use has grown and spread during the last decade. The boom in e-commerce also includes increased use of other media for trade, such as the telephone, television, fax, and electronic payment.

In recent years e-commerce in India has managed to capture the eye-balls and also the mind-space of the consumers at large such as never before and with this unprecedented growth, India has become the second largest market for e-commerce.

Definition of E-Commerce

Electronic commerce (e-commerce) means supply of goods and/or services including digital products over digital or electronic network. In common parlance, e-commerce is the buying and selling of goods and services on the Internet electronically, especially the World Wide Web and making payment electronically or via any other mode.  Generally, e -commerce may be comprised of: 

• E-tailing or "virtual storefronts" on web sites with online catalogues, sometimes gathered into a "virtual mail"; 
• Gathering and use of demographic data through Web contacts; 
• Electronic Data Interchange (EDI), the business-to-business exchange of data 
• E-mail and e-fax and their use as media for reaching prospective and established customers (for example, with newsletters) including internet telephony; 
• Business-to-business buying and selling; 
• The security of business transactions services; 
• Any other ac tivity of similar nature

Advantages of E-Commerce Business

E-commerce has been the catalyst for the enhancements and greater efficiency in areas that include: 

• Selling products and processing orders; 
• Tracking customers’ buying habits; 
• Presenting customers and prospects with product catalogues; 
• Presenting financial statements to investors; 
• Providing customers with inventory availability information; 
• Providing message databases for off-site sales people and staff; and 
• Processing purchase orders and invoice from suppliers

Elements of E-Commerce Transaction

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; 
• A way for the people to visit the place (websi te); 
• A way to accept orders, e.g., an on-line form; 
• A way to accept money – normally through credit cards. Alternatively, the companies may us e more traditional billing techniques either on-line or through the mail or cash on delivery; 
• 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; 
• A way to handle warrantee 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)].

These elements are not exhaustive considering the continuous changes in the domain of ecommerce. 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.

Challenges in E-Commerce Business

(i) Customer mindset
(ii) High cash-on-delivery (COD)
(iii) Payment Gateways have a failure rate and also has a cost associated
(iv) Internet connectivity
(v) Reachability
(vi) Poor Courier Services
(vii) Policy Related Issues
(viii) Aggressive Pricing Strategies
(ix) Heavy Discounts
(x) Free Delivery
(xi) High Commissions to vendors
(xii) Poor Logistics & Supply Chain
(xiii) Storage of goods
(xiv) High Cost of Customer Acquisition
(xv) Return of Goods
(xvi) High technical barriers to market entry
(xvii) Low level of digital literacy
(xviii) Regulatory Challenges–Taxation issues
Instead of above challenges, e-commerce has changed the way the organizations operated in their traditional business environments.  E-commerce implementations are often coupled with reengineering of traditional business processes by examining how business should be conducted by taking the advantage of the technology. Specifically, e-commerce replaces the traditional manual business processes with their automated electronic equivalents to accelerate ordering, delivery and payment procedures.  

Example: Ease due to on-line booking of train tickets and air tickets, trading in stock market, on-line purchase of movie tickets, on-line auction and shopping, on-line supply chain management, online banking, etc.

If we look at these changes closely, we will find that e-commerce is an enabler and has not changed the basics of the traditional business.

Various Business Models for E-Commerce

In the most basic sense, a business model is the method of doing business by which an organization can sustain itself ie., generate revenue. The need for e-commerce companies to adopt and innovate in the light of technological challenges and rising competition, has led to the evolution of multiple business models resulting into a very crowded and complex market.
Taking a holistic view of industry trends, with progressive liberalizations in the FDI policy, evolution of tax laws governing digital channels and advent of secure technology, e-commerce is poised for an exciting period of growth in times to come with simpler and legally compliant business structures.

Pictorial view of various E-Commerce Models

(i) Principal to Principal [P2P]

(ii) Principal to Agents [P2A]

(iii) Aggregator

Pictorial View of Various Principal to Agent E-Commerce Models

• Various models adopted by e-commerce players include – managed marketplace model (MMP), open market place model (OMM), inventory led model, social networks, aggregator model etc. and many more hybrid models still developing. 
• MMP is the most prevalent and preferred business model in the online retailing space.  Under MMP, fast moving goods are held on consignment basis wherein the e-tailor typically controls order fulfillment and exert pricing through complex structures falling in regulatory grey area.   
• On the other hand, the OMM, wherein no inventory is maintained by online retailer and goods are directly shipped by reseller to customer, is considered to be the most compliant option from the FDI standpoint.

(a) Inventory Led Model

Salient features-

• Inventory maintained by online retailer 
• Superior quality assurance to consumers 
• Timely delivery to consumers as stocks are maintained and monitored 
• Capital Intensive model 

(b) Open Market Place Model (OMP)

Salient features 

• Product is directly shipped by re-seller to customer 
• No influence on pricing 
• No inventory maintained by the online retailer 
• Prone to quality and delivery issues 
• Minimal capital investment required 
• As regulations currently stand, OMP is seen to be the most compliant from the FDI standpoint
  Example: eBay

(c) Managed Market Place (MMP)
Salient features- 

• Marketplace typically controls fulfilment 
• Fast moving goods held on consignment 
• Indirect influence on pricing and discounts 
• Some products are also sold at marketplace by sellers 
• Lower Inventory and warehousing cost 
• Owing to the nascence of the ecosystem, companies typically look to MMP model to control customer experience 
• Through this model, portals are seen to exert indirect pricing control through complex structures falling within regulatory grey area
  Example: Amazon

Classification of E-Commerce Websites

Business to Business (B2B) E-commerce Sites

B2B sites link different bus inesses or different parts of a business. Transactions on thes e sites take place between indus trial manufac turers, wholesalers or retailers . Special features of these transactions are high volumes per customer, lesser number of customers, secured payment systems, privacy of information, etc.
Example: This includes purchasing and procurement, supplier management, inventory, etc.

Business- to- Consumer (B2C) E-commerce sites 

B2C sites sell products or services directly to consumers. A large number of e-commerce companies fall in this category. Transactions on these websites are characterised by low volumes per consumer and a large number of consumers.

Consumer - to- Consumer (C2C) E-commerce sites 

C2C sites enable consumers to buy and sell from each other through auction or other similar sites. Exchanges involve transactions between and among consumers. These exchanges can include third-party involvement. 

Consumer- to- Business (C2B) E-commerce sites 

C2B sites enable consumers to set prices and business enterprises bid to offer products and services. Consumers can band together to present themselves as a buyer group in a consumerto-business (C2B) relationship. These groups may be economically motivated, as with demand aggregators, or socially oriented, as with cause related advocacy groups.

Terms of Agreement Between the Vendors and the E-Commerce Operators

• That a debit note shall be raised against the vendor in all cases where the goods supplied by it are found defective at any stage and such defective goods shall be sent back to it.  All expenses relating to such sale like cost of transportation, all kinds of discounts allowed at the time of sale including cash discounts shall be borne by the vendor. 
• That a debit note shall be raised agains t the vendor in all cases where the goods supplied by it are returned to it at any stage and all expenses relating to such sale and sales returned like cost of transportation, all kinds of discounts allowed at the time of sale including cash discount shall be borne by the vendor. 
• That during the cours e of specific event or promotion or any other mark eting ac tivity undertaken by the e-commerce operator, any planned liability on the sale of merchandise or services shall be communicated to the vendor and a decision on shared liability shall be taken on case to case basis and shall be communicated to and debited to the account of the vendor from time to time. 
• That the purchase order or the ame nded purchase order shall be deemed to have been accepted by the vendor, if the same is not otherwise communicated to the e-commerce operator within three common working days from the date of placement of such order. 
• That all goods and/ or services shall be delivered by the vendor in accordance with the time and delivery terms as contained in the purchase order/ amended purchase order.  Else, the same may be accepted at a discounted price at the discretion of the concerned manager of the e-commerce operator. 
• That in case of change in price or MRP the vendor should give minimum 15 days -time to the e-commerce operator.

Revenue Recognition For E Commerce Companies

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

• Membership and subscription; 
• Merchandising activities; 
• Advertising services; and 
• Other services like web-hosting, content selling, etc.

The basic principles of revenue recognition as set out in AS 9, ‘Revenue Recognition’, apply to recognition of revenue for the e commerce companies.
Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends.

Transaction involving Sale of Goods

Revenue is recognised when performance is achieved ie. when the following conditions have been fulfilled: 

• the seller of goods has trans ferred 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 
• No significant uncertainty ex ists regarding the amount of the consideration that will be derived from the sale of the goods. 

Transaction involving Provision of Services

Revenue is recognised and 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 uncertainty ex ists regarding the amount of the consideration that will be derived from rendering the services.

When does the ‘risk and rewards’ get transferred to the customer?

E-Commerce companies often are valued based on revenue multiples and hence, it is one of their most important metrics. The accounting issue involved here is primarily to determine timing of revenue recognition and presentation (gross vs. net). Most of the e-commerce companies either accept payments online through credit cards, internet banking, debit cards or cash on delivery. Additionally, in most of these companies, delivery is the responsibility of the company and hence, it becomes important to determine on when does the ‘risk and rewards’ get transferred to the customer.

Note: This issue is relevant for both B2C (Business to Consumer) and B2B (Business to Business) models.
Issue 1: Who bears the insurance cost/ risk? One of the indicators to determine the timing of revenue recognition is to know who bears the insurance cost/ risk.
(i) In practice, many of the l argee-retail companies enter into agreements wi th logistic providers who are willing to bear insurance cost and risk of delivery.

• Treatment: Under such contracts, companies would recognise revenue on despatch of goods from the warehouse.

(ii) Sometimes, cost of delivery is built in to the pricing of the product and the cost of transport is borne by the e-commerce entity; then the risk of delivery and loss is still with the e-commerce company.

• Treatment: In such cases, it may be appropriate to recognise revenues only once the products are delivered to the customer. 

Issue 2: Repercussions of Sales Return on Accounting 

(i) In practice, an option is given to the customers to return the goods sold. There are cases when the buyer has a right of return and there is uncertainty about the possibility of return.

• Treatment: Revenue is not recognised until the shipment has been accepted by the customer or the goods have been delivered and the time period for rejection has elapsed, 

(ii) Based on past experience, there may be cases, when the entity can make a reliable estimate of the amount of goods that will be returned

• Treatment: it would be appropriate to recognise revenue for the amount that is expected to be received for items that are not returned (assuming that the other conditions for revenue recognition are met).

Illustration 1: An e-commerce company purchases traded goods from a wholesaler. It 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 customers. Determine the revenue recognition for e-commerce company.
Sol: 
In the given case, the e-commerce company does not seem to bear significant inventory risk, however, it may bear the following: 

• credit risk 
• is primarily responsible for providing the goods to the customer, i.e., fulfilling the order
• direct pricing discretion 
• discretion in selecting the supplier/ wholesaler Therefore, in this case, the e-commerce company should reflect gross billing to its customers as its revenue.

Illustration 2:  An e-commerce company is a travel agent that sell travel tickets through an e-commerce platform.
Travel agents sell airline tickets to the public, generally at a price determined with reference to the market rate, but often pay the airline a discounted amount. The travel agent does not bear any general inventory risk because it does not carry tickets as its inventory and buys tickets only when it receives orders or bookings from customers.
What should be the revenue of the e-commerce company acting as a travel agent? Will your answer get change if the e-commerce company bears the credit risk say when corporate customers have an account with the travel agent and settle the account only after the travel agent has paid the airline for the ticket?
Sol:
In the given case, the travel agent does not bear any inventory risk, nor is it responsible for carrying out the services related to the ticket itself, because this is the responsibility of the airlines. The travel agent provides a service on behalf of various airlines and other suppliers and earns a fee. The travel agent’s revenue should reflect only the fee and not the gross amount billed to the customer.
The fact that the agency sometimes bears credit risk is not a determining factor and does not compel the agency to reflect the gross billing as revenue.

Accounting Principles Applicable to Specific Sources of Revenue of E-Commerce Companies

Accounting for Membership and Subscription Fee 

There are three ways in which membership or subscription fee may be collected 

1. Non-refundable fee
(a) Non-refundable fee for use of the services of the website for all services separately;
(b) Non-refundable fee (one-time payment) for indefinite use of the services of the website;
(c) Non-refundable fee 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. 

3. Periodic membership/subscription fee on monthly, quarterly, annual or such other basis.

Their accounting treatment is explained below 

(a) Non-refundable fee that entitle a member to use the services of the website by making payment for all services separately

• 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 AS 9.

Example: Amazon Prime is a facility which is a paid service. In this facility during the seasonal sale of Amazon, the subscribers of Amazon prime are provided the accessibility to the website about an hour prior to the other customers.

This facility is available on payment of a subscription or membership fee. The subscription fee is only for the accessibility of website. It does not include anything for the products purchased. The products which are purchased are charged separately.

Thus this has two components 

• Towards subscription for the Amazon Prime facility which is to be capitalised 
• The other is towards sale of goods on the website, which is revenue in nature and should be accounted on the basis of AS 9 

(b) Non-refundable fee that entitle a member to use the services of the website indefinitely without making any further payment for use of services Their accounting treatment is explained as follows: 

• 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. Accordingly, up-front membership fee, even if non-refundable, is 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. 
• Consequently, recognition of such non-refundable fee should be generally deferred and the same should be recognised systematically over the period(s) during which fee is earned.
• However, keeping in view the uncertain nature of business of an e-commerce company, non-refundable fee that entitle a member to use the services of the website indefinitely 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. 
• Also in case the specified period is less than five years, the fee 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.

Example: If one opts for the paid services of naukri.com which for a period of one year from January to December, the service charge is Rs 1200 for a year, then it should be accounted as follows in case of e-commerce companies

When money is received for service to be provided over a year
In the month of January when the service is actually provided, revenue should be recognised to that extent
(c) Fee that is refundable subject to the fulfilment of certain conditions stipulated in the subscription agreement 

• In respect of membership fee that is 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’.

(d) Periodic membership/subscription fees on monthly, quarterly, annual or such other basis 

• 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.

Example 

1. ABC Ltd, is a software business that makes inventory tracking software. A customer can use ABC Ltd.'s software to track the different products they sell, including quantity available and the date they should place their next order to restock. ABC Ltd.'s software is accessed online (Software as a Service, or "SaaS"). Their customers have to come to the website and login to gain access to the software and see the list of their inventory products' information. 
2. The company charges a monthly subscription fee of ₹ 6,000 for access to the service. The customer is charged the first month's ₹ 6,000 fee as a part of the signup process. 
3. Once the customer has paid the ₹ 6,000, they immediately have access to the software for the next month. 
4. At the start of each new month, ABC Ltd. charges the customer another ₹ 6,000. ABC Ltd. will continue to provide access to their software as and when the customer will pay the monthly fee.

On day one of the customer's subscription, ABC Ltd. has collected ₹ 6,000. The money is in their bank account, But the money cannot be recognized as revenue because the service has not yet been delivered by the Company to the customer. If ABC Ltd. decides tomorrow to stop providing their inventory tracking software, the customer will have paid ₹ 6,000 for 30 days of access to the software, and only received one day. To account for this discrepancy between money the customer has paid and services the company has provided the above rules are to be applied.
When the customer signs up and pays their first month of service, ABC Ltd. needs to account for that money by placing the balance in a deferred revenue account instead of directly into revenue. The accounting impact would look something like this:

When the month has passed, and the service for that month has been completely delivered, ABC Ltd. has delivered the service to the customer, which means they can recognize the full amount of that sale as revenue. The accounting impact would look something like this:

From a financial reporting standpoint, a business should be able to see at any given time how much money they have collected from customers for subscription revenue, how much of that money is still in a deferred revenue account, and how much of that revenue has actually been recognized because the service has been fully delivered to the customer.

Merchandising Services

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 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.

In assessing whether revenue should be reported on gross basis with separate recognition of cost of sales or on net basis, it should be considered whether the e-commerce company:
(a) If the company 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 then it. is appropriate to recognise revenues and the related costs on a gross basis.

Example: Flipkart recognises revenue on gross mercantile system ie. they account for revenue on gross basis and the corresponding costs of the products
(b) If the company 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 company is merely engaged in providing the service of bringing the purchaser and the seller together then it would be appropriate to recognise only the service charges as revenue, similar to commission.

Example: Magic bricks is a company that deals in real estate sale on internet. They only take quotation from the seller of the property and approaches the buyer with options of the property available. They only act as an intermediary between the buyer and the seller. They do not maintain inventory neither bears any risk and rewards in the property. Thus income source for this company is commission.

Auctions:
Some e-commerce companies host auction sites as part of their on-line activities where users can purchase or sell goods or services. The e-commerce company ordinarily earns auction revenues through two sources:
(a) Listing fee is the up-front fee that the e-commerce company 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 fee is 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.

Example: OLX deals in the listing of goods and services online to be purchased by the prospective customer. As a part of listing agreement, OLX charges an upfront fee of say ₹ 2,000 while the product is being listed for a period of 10 months on the OLX website. OLX should recognise the income of listing fee as follows:

After the completion of 1 month of listing agreement following entry should be passed

(b) Transaction fee is for facilitating the transaction and are usually based on a percentage of the revenue earned by the seller from the on-line sale, Such fee should be recognised as revenue by the e-commerce 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.

Continuing with the above example of OLX, when the product listed by the seller on the website is sold, OLX in addition to the listing fee for the month, also charges transaction fee which is some percentage of the product sold through website.

Say the product sold is worth ₹ 15,000, Transaction charges will be 2% of ₹ 15,000 i.e ₹ 300

Shipping and Handling:
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.
(a) The products sold on-line are invoiced to the customers at a composite rate including shipping and handling charges 

• Treatment: 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. 

(b) Shipping and handling charges are recovered separately as an absolute amount or as a percentage of the sale value 

• Treatment: 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.

Multiple Elements Arrangements:
A multiple element arrangement generally exists where an e-commerce 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. It is sometimes customary to bundle such products and services for a consolidated price.

For accounting purposes, it is appropriate to ‘unbundle’ the separate elements of the arrangement or contract. For this purpose, company-specific fair values in respect of which objective evidence is available should be used, he., what the company would have received had it sold each item/ service separately. Company-specific objective evidence of fair value is determined in respect of transactions with unrelated parties.

Example: An e-commerce company may agree to host another company’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 company has evidence that in its recent transactions, it has charged separate fee 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.

In the absence of availability of sufficient company-specific objective evidence of fair values for the allocation of revenue between various elements, it would be appropriate to defer recognition of the entire revenue from the contract until (a) Sufficient company-specific objective evidence comes into existence, or (b) All elements of the arrangement are delivered, whichever is earlier, in the latter case, the composite amount is recognised as revenue on delivery of ail elements of arrangement.

Associated costs related to such deferred revenues should also be carried forward until they are capable of being matched against revenues recognised in the financial statements. 

Advertising Services 

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’. 

Advertisement for customers with guarantees of minimum number of impressions or click-throughs: 

• It is appropriate to recognise revenue on the basis of the number of impressions or ‘clickthroughs' unless another systematic and rational basis of revenue recognition is more representative of the services rendered. 
• This is in line with Appendix to AS 9 which states that for “advertising agencies, media commissions will normally be recognised when the related advertisement or commercial appears before the public and the necessary intimation is received by the agency 
• To the extent the minimum guaranteed impressions are not met, recognition of the corresponding revenue should be postponed until the guaranteed impression levels are achieved. The advertising revenue should only be recognised when no significant obligations remain at the end of the period and collection of the resulting receivable is reasonably certain.

Example: ABC is the online advertising agency which has entered into a contract with the manufacturing company PQR Ltd for advertisement of shirts manufactured by PQR Ltd.
The advertisement consideration is based on the number of click throughs as follows:
In the month of January 20X1, the advertisement of PQR Ltd on ABC website is viewed by 89 customers. So no revenue to be recognised in the month of January, 20X1
In the next month i.e, February 20X1, the advertisement is viewed by 20X4 customers. So the revenue to be recognised is ₹ 20,000 + 20 x 100 = ₹ 22,000

Advertisements agreements for customers, without any minimum guaranteed impressions: 

• An e-commerce company may enter into an agreement with another company to host a banner advertisement containing details of products/services offered by that company. 
• 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.

Example:
ABC is a professional courier which enters into agreement with an online ticket booking website. Undergoing the contract of advertisement, the space is allocated to the courier company on the website irrespective of the clicks, i.e it is a banner advertisement.
Here the revenue of the ticket booking is based on the period of display of ad of the courier without any consideration to the advertisements viewed by the customer.
The contract is for a year and the price of the contract is ₹ 12,000.
The ticketing company should recognise ₹ 12,000 as advance received for service to be provided in future and every month ₹ 1,000 should be accounted as revenue.
1. When advertisement amount is received
2. When advertisement amount is accounted as revenue

Measurement of Consideration in Advertising Barter Transactions

E-commerce companies sometimes enter into advertising barter transactions each other, in which they exchange rights to place advertisements on each others’ on-line properties, i.e. websites or web pages. A barter transaction may involve exchange of advertising time for products or services.

Revenue from advertising barter transactions should be recognised only when the fair values of similar transactions are readily determinable from the entity's history._________________ 

• For determining the fair value of advertising space surrendered for cash to be considered ‘similar’ to the advertising space being surrendered in the barter transaction, the advertising space surrendered must have been in the same media and within the same advertising vehicle (for example, same publication, same website, or same broadcast channel) as the advertising in the barter transaction. 
• It would be appropriate to consider fair values of transactions that have occurred not later than six months preceding the sale of similar advertising to unrelated buyers. This will ensure that the comparable values are current and reflect the best estimate of a price at which a willing buyer and a willing seller would be willing to exchange an item or service in a situation other than a distress sale. 
• If economic circumstances have changed such that prior (but not more than six months old) 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. 

In addition, the characteristics of the advertising space surrendered for cash must be reasonably similar to that being surrendered in the barter transaction with respect to:
(a) Circulation, exposure, or saturation within an intended market;
(b) Timing (time of day, day of week, daiiy/weekly, 24 hours a day/ 7 days a week, and season of the year);
(c) Prominence (page on website, section of periodical, location on page, and size of advertisement);
(d) Demographics of readers, viewers, or customers;
(e) Duration (length of time for which the advertisement will be displayed).

Other Services

Revenue from maintenance of websites including web hosting: 

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:
Some e-commerce companies maintain websites which contain text or other material which can be sold as 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 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 e-commerce company should determine the time at which the delivery of the content is considered to be complete and recognise the corresponding revenue.

Example: 
GK classes provide contents of their syllabus online to the students who purchase it. For the students purchasing the content online a user name and a corresponding password is made available to the students which can be used by the students for downloading the contents.
Thus, here the content is said to be delivered when the user id and password is made available to the students.