We have a client who provides a service, but takes a deposit as much as 24 months in advance of the event in question.
They have a contract which states after seven days, the 25% deposit which they take becomes non-refundable.
Obviously, I understand that normally you would treat the deposit as held in advance until the event is performed (subject to any costs incurred).
My question is two-fold:
1 - Does the fact the deposit has become non-refundable change the deposits in advance rule?
2 - With regards costs incurred, our client has purchased a number of additional items, which will be treated as plant, to cope with the additional demand they are now discovering - whilst this is not a P&L charge, could an element of the cost be offset against the deposits figure? i.e. if the total deposits are £50,000, but they have purchased plant to cope with the additional demand of £30,000, can any element of that be used against the deposits in advance? The assets will be used for future events outside the ones which they are holding the deposits for.
Any help you can give me would be much appreciated.
Thanks
Replies (9)
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I think you hold them as deposits on the balance sheet until the earlier of:
the cancellation of the event by the customer resulting in forfeiture of the deposit;the completion of the event
Nit sure what you are asking about the related capital expenditure. Please clarify.
Plant costs
Whilst specific events may have triggered the desire or need to expand capacity, plant is purchased for ongoing use in the business. The plant is not acquired for the specific event, and will continue to be used for future events, so is a general business purchase. Any tax deduction therefore follows normal capital expenditure rules.,
I would recognise the 25% after 7 days
Revenue for provision of services is recognised when it is probable that an economic benefit will flow to the entity and the revenue and costs can be reliably measured.
I would argue that the 25% is much more than probable after 7 days, and would book this as revenue. The remaining 75% would remain on the balance sheet.
75%?
The remaining 75% would remain on the balance sheet.
What 75%? We are told that the customer pays a 25% deposit. That is all there is to account for.
Costs
I would argue that the 25% is much more than probable after 7 days, and would book this as revenue.
If you do this you should also provide for 25% of the costs of putting on the event. Otherwise, when the event comes round you will be setting 100% of the costs against only 75% of the sales revenue. Hence my suggestion above.
I agree
With the first two responses, but disagree entirely with the third, which is inconsistent with application note G to FRS 5.
The point is
That whilst the contract state the deposit to be non-refundable, if the supplier fails to put on the event, the customer is entitled to their money back.
Apologies
Completely misread the question!
Please do ignore my response - i won't read & reply in such haste in future.