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SSAP9 - Stocks and long term contracts - Difference of opinion

Hi all,

I would be most grateful for any thoughts, comments and suggestions regarding the following.

The client is a housebuilder, developing large properties (£1m+).

The current development has just had its foundations laid, and steels put in place - basically the first stage has been completed.

Therefore the company has decided to make a claim for payment of £50,000 from the prospective buyer as a sort of stage payment and to ease the developers cash flow.

Opinion 1

Whether the company says this is just a payment on account, a stage payment or an invoice, it will be subject to SSAP9 reporting requirements as the project will span at least two accounting periods. Therefore, if the attributable costs and overheads are less than the £50,000, a profit is reportable at the year end, and if the attributable costs are more, a loss should be recognised, and prudence and other principles state it should be immediate (or at the next financial reporting date, like SSAP9 would enforce).

IE value of work completed to date to sales (Cr Sales, Dr Debtors/Amounts recoverable on contracts), attributable costs of work completed to date moved from WIP to Cost of Sales (Cr WIP, Dr CoS), and payment made posted against Amounts recoverable on contract (Dr bank, Cr, Amounts Recov on Contract).

Opinion 2

The company argues this is 'just' a payment on account, and therefore does not recognise it in the profit and loss account until the project is completed and the completion invoice is raised. IE perhaps wait two years (until it is completed) before reporting any profit for this development.

It know which I think is the correct option, however it is the FD who has suggested the alternative, and somewhat dismissed the idea of SSAP9. I do not know whether I am worrying too much about it's treatment, or whether the potential SSAP9 position has been overlooked.

Any thoughts highly appreciated.

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04th Jan 2013 10:12

Long term contract

Is this not just a case of:

Recognise income as a % of the completion of the total project price [in the past I have done this by reviewing costs to date divided by total anticipated spend]; the debit posting to amounts recoverable under long term contracts within debtors (split between >1 year and <1 year based on expected billing timings).

Reduce the debtor by any amounts physically paid in the year (i.e. the £50,000 DR cash, CR amounts recoverable under long term contracts).

The costs to offset against the income recognised will be those incurred during the year under the normal accruals basis, which should generate a profit unless the project is being run at a loss, in which case the full loss for the entire project should be recognised immediately.

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By Jobedi
04th Jan 2013 11:08

mbdx7ja2

Thanks mbdx7ja2,

I agree 100% with you, what you are describing are the principles instructed by SSAP9.

What you are saying is how I envisage it exactly - reporting of profits at each year end, no matter how you describe the £50,000 payment.

It is just the directors only believe the development will present the potential for a tax liability upon its completion, in say, two years. I am just trying to ensure that my concerns are valid before I raise this point to them.

Furthermore, I know they will suggest just calling it a payment on account - what i am trying to establish is, using more knowledgeable members, that calling it a 'payment on account' makes no difference to it's treatment, and the appropriate profit/loss it is still reportable at each year end date?

I have completed ACCA paper F7 and am a full AAT member, so i have some theoretical knowledge of this situation, however I am just seeking reassurance from more experienced members, furthermore, the professional principle of professional competence and due care states a second opionion (or ten) may be prudent.

 

All comments greatly appreciated.

 

 

 

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04th Jan 2013 11:24

To confirm, I agree...

...with your analysis.  You may also wish to throw in UITF40 and FRS5 Application Note G.

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By Jobedi
04th Jan 2013 13:14

Thanks mbdx7ja2

Great, thank you MBD, i will also definately include your additional references.

 

Any other thoughts or suggestions, anyone?

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