Accruing for annual accounts fee

Accruing for annual accounts fee

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A client company prepares accounts to 30th November. The shareholders sold their shares to new owners. The price was dependent on accounts prepared by us to the date of sale - 8th October 2006. Because it was no more difficult to do so, we actually prepared full statutory accounts for the 10 months or so, but charged the shareholders personally on the basis that the purpose was to value their shareholdings (and because it was in the sale agreement). We therefore included no accountancy fees in the accounts to 8th October.

The purchasers could have opted to shorten the company's accounting date to 8th October 2006 and file the statutory accounts we had prepared at no cost to them. They could then have extended the accounting date to 31st December 2008 to coincide with their group accounting date and prepare the next accounts for just under 15 months. Instead, the purchasers have opted to ignore the completion accounts and extend the company's most recent accounting date to 31st December 2006 and prepare accounts for the 13 months to that date.

The purchasers claim that we should have included an accrual in the completion accounts for 10/13 of the estimated fees for their accountants to prepare accounts for the 13 months to 31.12.06. We believe that it is unfair for our clients to pay one full set of annual accounts fees directly and 10/13 of another by reduction of the selling price.

So, the question is - does a fee for preparing annual accounts accrue evenly throughout the year or does it arise only at the accounting date? Indeed, as no part of the work will have been done by the accounting date, should the fee be recognised in the accounts as a creditor at all?
Euan MacLennan

Replies (6)

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By neileg
28th Feb 2007 11:15

Surely
This is what sales contracts and solicitors are for!

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By Chris Smail
27th Feb 2007 11:47

Directors can prepare their own accounts
So no accrual untill accountants appointed. If you kneww you were to continue and prepae the year end I think you should have accrued, but as described I think not.

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By AnonymousUser
27th Feb 2007 12:18

The question is when does the liability arise?
Referring to the ASB's Statement of Principles, "Liabilities are obligations ...to transfer economic benefits as a result of past transactions or events.... The notion of an obligation implies that the entity is not free to avoid the outflow of resources."
It could be argued that the Companies Act requirement to prepare accounts implies a constructive obligation at the start of the year. The year's first transaction would confirm that dormant accounts would not suffice - relevant for measurement.
In addition, the requirement to prepare a profit and loss account (as opposed to the year end balance sheet) suggests a continuously accruing liability.
This constructive liability is eventually displaced, and given monetary certainty, by the fee note.

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Euan's picture
By Euan MacLennan
28th Feb 2007 09:59

Thanks
... to all of you for your comments.

Actually, it wasn't a multimillion £ deal but then neither were the fees. Nor was it an audit. The point arose as a result of the purchasers' accountant doing a bit of diligence on the completion accounts.

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By adam.arca
27th Feb 2007 13:02

Amazing...
..how pernickety some people can be. This is presumably a multi £m deal yet they're quibbling over a few £k.

I tend to agree with you, Euan.

As we all know, the cost of preparing accounts for, say, 6 months is not half of that for preparing a full year. For most clients with decent accounting systems, the cost of processing transactions is much the smaller element when compared to preparing the balance sheet, sorting queries, meetings etc etc.

Since accounts have to be prepared at the year end date, the cost of the bal sheet etc rests wholly with the new owners. They may have a case for saying that 10/12, or whatever, proportion of processing the transactions should have been accrued into the management accounts but that is a) arguable at best, and b) peanuts in amount.

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By listerramjet
27th Feb 2007 13:02

hindsight!
you don't refer to audit, so am assuming that is not required.

It appears your assumption for the completion accounts was perfectly reasonable. How would you have been able to predict the purchasers actions?

Although trading takes place throughout the year accounts prep is a discrete activity, typically taking place at and after the period end. There was no contract when the completion accounts were prepared. In addition to the options you outline it is possible the purchasers may have prepared their own accounts - no cost implication for that option.

At the date of the completion accounts the sale was not complete - the purchasers future intentions would therefore not be relevant. At that point the sale was a post balance sheet event - and non-adjusting!

Presumably there was nothing specific in this regard in the sale agreement?

You had an agreement with the vendors - as evidenced by the fact that you billed the vendors direct.

Did the purchasers proceed on the basis of the accounts you prepared? Was there any due diligence? Did anyone question the assumptions you made? I imagine you have an engagement letter that makes clear the purpose the accounts were prepared - an engagement letter between you and the vendors?

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