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I have a builder client who normally builds specific houses/buildings for clients who approach him.
Business was a bit quieter last year and he decided to buy some land and build flats on a speculative business.
At the year end he has 6 partially completed flats which he wants to include in the accounts as WIP with no profit. His argument is that he has no end client (yet) and he does not know exactly how much he will get for each flat when completed. He therefore believes that profit cannot be realistically forecast on the job to date.
His business has done no other work this year and consequently shows no turnover (something the client is adamant must remain the case - he did accountancy many years ago and I always have "arguments" with him)
I believe that the value of the work undertaken to date should still be shown as turnover under SSAP9 and if appropriate an element of profit should be included in the turnover figure. The other side of the entry should go to "Amounts recoverable on contracts".
This is the treatment we use normally when he has an end client and a price agreed up front.
Any comments gratefully received.
John

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Dennis Howlett
By dahowlett
15th Mar 2006 15:14

He's right - I think
I used to be in construction in both speculative housebuilding and contract work and had a lot of exposure to this discussion.

There is a fundamental difference. In contract work, you're paid on account by the main client on the basis of measured work. That allows you to obtain a certificate from a QS that can be assessed against costs. Even then it is necessary to make provisions for advance payments on what are called prelims -preliminary costs that are actually spreads over the period of the contract.

In speculative housebuilding there is no market until the property is put on the market, a buyer is in place and a contract has been exchanged.

This is fundamentally different to the WIP position for services where here is a client in place.

SSAP 9 is pretty clear about these things.

HMRC might argue that there is a theoretical market to which a notional sales value can be imputed but they'd be wrong (IMO), especially if the property is under construction and not complete. Even if you obtain valuations from agents, they are always estimates. And crude ones at that.

Taking this one step further, fair value 'could' be applied but again fair value for what? WIP only and it should be stated at the lower of cost or net realisable value.

It doesn't matter if he finds a buyer the day after year end. We're talking about a point in time, not a movable feast.

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By AnonymousUser
15th Mar 2006 17:02

Thanks Dennis, I think I have become so wrapped up in UITF 40 that I have lost my perspective.

A quick read of FRS 5 and SSAP 9 and it's quite clear that no contract means it is treated as WIP.

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By IanRiley
15th Mar 2006 19:08

Isn't it......
Isn't it in the clients interest to spread the profit over two years rather than have the profit on 6 flats potentially taxable in one tax year(higher rate tax, none use of this years personal allowances if no other work done etc)

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Dennis Howlett
By dahowlett
16th Mar 2006 10:56

not the point
Ian - the tax consequences are irrelevant here. Accounts have to be prepared in accordance with accounting standards and as the questioners notes SSAP 9 is clear on this.

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