Recognition of Annual Software Fee

Recognition of Annual Software Fee

Didn't find your answer?

The contract was signed in Dec 2014 for an annual software cost for planned duration of 2015.

Can I actually accrue for the cost in 2014? If no, what is the accounting policies that govern this accounting treatment?

Replies (6)

Please login or register to join the discussion.

avatar
By J.Johnston
04th Jan 2015 19:39

Prepayment
If the year end is December, but the costs relate to 2015 then this is a prepayment

Thanks (0)
avatar
By DKB-Sheffield
04th Jan 2015 20:14

@mellybetty

Am I correct in thinking you haven't paid for the software in December and are looking to bring the cost into the prior year accounts (e.g. dated December 2014)

As a result, are you looking at whether the cost of the software (which will be provided in 2015) can be brought into the 2014 accounts for CT relief?

There is no definitive answer to the broad-brush question you have asked. If the contract has been signed and if you must now pay for the software without any way of getting out of it, I do feel there would be a case for allowing the accrual.

My honest suggestion however is this... if the year end is 31/12/2014 it would make sense to prepare the accounts in say 3 or 4 months when hopefully the contract has kicked in and the proof is there for all to see.

Please note, there are plenty of policies aimed at this matter. However, if you are talking about whether the accrual is available for relief against Corporation Tax, you should view the tax position (CTA) as opposed to purely reviewing the accounts position (FRS etc.).

Finally, as a comment, usually general accruals are disallowed for tax purposes.

Thanks (0)
Routemaster image
By tom123
04th Jan 2015 20:20

Matching concept

One of the fundamental concepts of accounting is the matching concept. If the annual software subscription runs until the end of 2015 then you must treat the bulk of it as a prepayment. If the invoice is unclear as to the dates, and is dated some time in Dec 2014 then you can charge however many days are appropriate for the time from the invoice date to the year end.

Thanks (0)
avatar
By carnmores
05th Jan 2015 10:41

there is also the queation of materiality

roughly how much are we talking here , is it a co or individual

Thanks (0)
Euan's picture
By Euan MacLennan
05th Jan 2015 11:32

Overstatement of creditors and debtors

The accounting treatment is straightforward:

If the contract was signed and/or the invoice was dated in December 2014, but not paid, you should accrue the cost in December and charge it to the P&L in December.If the cost was paid in December, there is no accrual, but you should charge it to the P&L in December.To the extent that the cost related to 2015, you should recognise a prepayment and credit it to the P&L account, which may well mean no net charge in December 2014.

The tax treatment follows the accounting treatment.

However, on a recent audit inspection, the ICAEW inspector criticised us for following this treatment for an annual commercial rates bill, dated in March, for accounts to March.  The amount was material.  He said that the result was an overstatement of both creditors and debtors and we should have omitted (or netted off) both the accrual and the prepayment.  We asked the ICAEW Technical Department, who confirmed that it was absolutely normal to recognise both the accrual and prepayment in these circumstances and that the audit inspector was wrong.

Thanks (0)
avatar
By carnmores
05th Jan 2015 11:41

Euan

I would expect you to see off such individuals!

Thanks (1)