ICAI's new guidelines should finally rid dotcoms of dubious accounting practices.

By Dilip Maitra 

They may have no revenue to talk about, but now the dotcoms at least have new accounting rules to go by. Last fortnight, the Institute of Chartered Accountants of India (ICAI) issued a monograph on accounting rules to be followed by internet companies. The new norms include directions on revenue recognition from membership fees, banner, barter advertisements, and sale of services and products. For a mom-and-pop industry long used to inane valuation measures such as hits, pageviews, or sheer hype, the new rules will bring sanity in book-keeping. Says V. S. Sudhakar, Managing Director, Fabmart India, an e-tailer: ''ICAI's guidelines are quite extensive and based on prudent accounting principles.''

The first accounting regimen that ICAI wants dotcoms to follow relates to membership fees. The institute feels that although the membership fee collected is non-refundable, it is not appropriate for dotcoms to recognise it as revenue as soon as they are received. As the master beancounters explain: ''Typically, registering members, signing the contract, enrolling customers or activating services are not discrete revenue earning events. 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.'' So ICAI suggests that such membership fees, in general, should be treated as earnings staggered over a period of five years.

E-tailers are in for a reality check, too. Most dotcoms recognise revenue based on the value of goods sold online. ICAI says that won't do. Unless the ownership of the goods sold rests with the e-tailer, it can only recognise the commission it receives from the transaction as its revenue. In the case of revenue from banners and other paid ads where the fee is contingent on a minimum number of impressions or click-throughs, the revenue should not be recognised until that promised level has been reached. Says the monograph: ''The ad 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.''

A gray area in revenue recognition is the valuation of barter deals in advertisements. Since the ad is not paid for, the value of earnings becomes arbitrary. To tackle this problem, the institute has suggested that revenues from barter ads should be recognised only when the values of similar transactions are readily determinable from the entity's last six months history. Says Sanjeev Agrawal, Head (Internet Group), Ernst & Young: ''A lot of wild things have happened. This will bring some clarity.''

More importantly, stricter accounting practices could enhance transparency in an otherwise murky industry.

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