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Are you allowed to accrue an uninvoiced cost of a tangible fixed asset?

Here is the scenario:

Suppose you've been quoted £10K from a supplier for website development over a 3 month period. 30% was invoiced and paid upfront before any work commenced. The development did not go according to plan and by the end of the year (12 months later), development work was only 70% complete. No invoice has been issued for the remainder of this work completed.

Is one allowed to accrue the additional 40% cost of this fixed asset (given the current working state of the website) which will also allow the company to claim a higher capital allowance in the first year due to AIA?

At what stage does one start depreciating the asset? Only following 100% completion? If that is the case, can you only claim AIA at this stage?

Thanks for your input.

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22nd Nov 2012 23:27

Well..
Has the Company paid anything and does it intend to pay anything toward the remaining 40% of the stated 70% completion status?

If it has paid something then absolutely.

If it hasn't then check the terms of the contract between the two Companies, you may be able to account for a provision (future obligation, past event, etc. - must comply with FRS7 (I think) in order to be allowable for CT)

Of course if it never pays the amount of the provision, then it will have to be reversed eventually and your gain may only be temporary or infact an increased charge (say, if you go over the next CT band)

To my mind I think the questions to ask are is there an obligation and if so, are we going to pay or challenge it, and if we're going to challenge then I might put a cheeky provision in for a year (depending if allowable) because it would be prejudicial to conclude on the outcome outside of the current contractual obligation (and certainly not prudent)

Without any payment you're fabricating costs and you can't revalue your intangible website as its not got a homogenous market etc.

Maybe you should consider a sale at MV to the pension fund and rent back. How you get to MV of the website will be a sticky wicket though I reckon.

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22nd Nov 2012 23:24

Depreciation
From when brought into use

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Hang on

There are a few issues here, but you need to start with accounting treatment:

You say it's a tangible fixed asset. Are you applying UK GAAP or IAS? Under UK GAAP if it's a fixed asset, it would indeed be a tangible fixed asset. Under IAS if it's a fixed asset, it would be an intangible asset.Is it a fixed asset? Have you applied UITF29 (for GAAP) or SIC32 (for IAS).As Chris says, if it's a fixed asset, you only start to depreciate it when you bring it into use.Can you recognise the additional 40% cost  Yes, when it's finished, you will have a liability for the remaining 70% and 4/7ths of that work has been completed, so you do have 4/7ths of the liability. I don't think that FRS12 (Chris!) is in point.

Tax treatment:

UITF29/SIC32 will determine whether or not it's a fixed asset. If it's not, you will recognise the cost as revenue as you incur it (ie now).Otherwise, you will claim P&M capital allowances.Capital allowances aren't given on assets but on capital expenditure on the provision of plant and machinery, and are only available on capital expenditure that's been incurred.Capital expenditure is incurred for capital allowances purposes (broadly) when there's an unconditional obligation to pay an amount of expenditure.30% of the expenditure already qualifies for CAs/AIA70% will, form the sound of it, only become unconditional on completion and CAs/AIA claimed then.Accelerating accounts recognition does not accelerate AIA eligibility.If you're applying IAS, you will also need to elect it out of the intangibles regime in order to claim CAs.

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By comfin
24th Nov 2012 04:23

Thanks!
Thanks for the above info, completely forgot about looking up on FRS12! Got lots I need to consider now!

Yes, I am applying UK GAAP and hence why website is classed as a tangible fixed asset, and not an intangible fixed asset.

The website is actually the business (i.e. a web portal for bidding, a bit like eBay) and not just a site for information purposes. So the business will only start generating a revenue once 100% complete & launched.

Unfortunately there is no formal signed contract, and the client and supplier have not decided what they are going to do going forward. Probably challenge any costs that are invoiced (if any) and move to a new developer.

I assume, for now, a claim against the 30% already paid up FA and worry about the rest when they can make up their minds!

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