Deposits - Revenue Recognition for Design element

Deposits - Revenue Recognition for Design element

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My employer runs a kitchen shop and due to the opening of a second shop the accounts year ending December 2015 will show a loss of  circa £50,000.  

Deposits of £26,000 (including 1 customer's 25% deposit of £11,000) have been taken for kitchens that will be delivered and installed in 2016.   I have therefore deferred this income into next year's accounts.  However based on the fact that some 60 hours of design work has taken place I am being instructed by my employer to take the whole deposit amount as income.  This design work has been completed by employed designers at a cost to the business of £1500.00.  I have advised that this cost should be carried forward as WIP.  There are no other cost of sales.  

The deposits are in theory non refundable and are covered by KBSA (insurance), which is granted on production of accounts.  

I feel that by including this full deposit amount as revenue the accounts will not show a true and fair position of the company and it would be morally and ethically wrong.   I am currently being pressurised into doing so and I would really appreciate any advice or guidance you are able to  offer as it is making my position untenable.  This is a limited company.  

Thank you in advance for any assistance you  are able to offer.

PS  The Sales contracts detail the Kitchen Furniture, Appliances, Worktop etc with relevant prices.  There is no mention of a design fee within this.

Replies (8)

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By tom123
03rd Dec 2015 12:23

It's a no from me.

I would just be carrying the design cost forward in WIP.

Even if you tried to make an argument for releasing some deposit as income, I would only want to match the cost of the work undertaken - so comes to the same thing.

Refundability or not doesn't really come in to it. You haven't done the substantive work, so cannot recognise the revenue under the fundamental concept of matching.

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By johngroganjga
03rd Dec 2015 12:57

And also refundability is a red herring. If you never completed the delivery and installation of the kitchen do you think you would not have to refund the deposit?

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By paulwakefield1
03rd Dec 2015 13:18

Agree with

above responses and your own views.

If it helps, there is FRS 102 Example 7 in section 23 (para 23A.9) which is explicit or paras 4.2 and 4.3 of the FRSSE which require more interpretation but it should be easy to show that the suggested profit on the design element is grossly disproportionate.

Given the pressure that you are being brought under and if you belong to a professional body, it might be an idea to contact their support network such as the ICAEW's Support members Scheme.

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Replying to Moonbeam:
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By Sally Martin
03rd Dec 2015 13:47

Thanks so much Paul.  I

Thanks so much Paul.  I really appreciate your help but I wonder if you can assist a little further.  

Whilst I can find FRS 102 Section 23 online .  I am unable to find the specific example that you refer to.  Perhaps you would be kind enough to guide me in the right direction or send me a link?  Sorry!  Cheeky I know!

 

Thank you once again

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By Sally Martin
03rd Dec 2015 13:22

Thank you both for your responses truly appreciated.  

 

Sorry to blur the edges with the deposits refundability, my employer was telling me 'they are non refundable deposits so it's ok to take them as profit' which is clearly wrong but I guess I had this in the back of my mind when posing my question.  

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Replying to elliottchandler:
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By Sally Martin
03rd Dec 2015 14:10

You're an absolute star Paul.  

Thank you so very much.

 

 

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Stepurhan
By stepurhan
03rd Dec 2015 14:44

Refundable red herrings

The non-refundability of deposits is often misunderstood for income recognition.

They are non-refundable only when the customer changes their mind about the purchase.

If the supplier (your business in this case) changes their mind about doing the job then the deposit will always be refundable. Only once the work has been done is it allowable to retain the deposit.

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