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Income Recognition?

Income Recognition?

Client (company requiring audit) has sold 33 acres of land for housing development.

The deal is the company s getting £2m upfront, plus up to a maximum of additional £6m over and above this depending on house sales over the next 10 years.

What is the feeling on income recognition?

I have my own thoughts but would appreciate comments.

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17th Apr 2012 11:29

Upfront
Why do you need a feeling about this?

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By blok
17th Apr 2012 11:36

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So you would recognise the £8m income in year 1?

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17th Apr 2012 12:01

My thru'penny

You can't recognise income without creating an asset.

With respect to the asset, my view is that it is a contingent asset to which FRS12 applies. FRS12 defines a contingent asset as "a possible asset that arises from past events whose existence will only be confirmed by the occurence of one or more uncertain future events not wholly within the entity's control".

Is there any contractual obligation on the developer to complete the development and sell a certain number of houses within the 10 years?

If not, you can't recognise an asset (and therefore the corresponding income) until the realisation of it is virtually certain. The asset (and the corresponding income) should be recognised only in accordance with paragraphs 31-35 of FRS12.

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By blok
17th Apr 2012 12:07

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Thanks Steve,

That was where I was headed.

There is no contractual obligation for the purchaser to pay the added consideration until such time as sales take place.  There is a formula that detremines the quantum at the end of each period.

I can't recognise the asset (debtor) unless I can measure it reliably and I dont think I can.

 

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