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Accounting for income in advance

Is it ok to account for revenue for a 12 month licence all in one month?

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Hi All,

I have a quick question on how we account for some of our sales. We sell contact data with a 12 month usage licence. Before we have been accounting for the sales as prepaid income. If we had a sale for £85k we would split this over the 12 month usage licence but in theory the customer could get access to all the information on day one if they wanted to. 

Can we actually account for this £85k all in the month of sale instead of treating it as prepaid income?

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09th Apr 2019 09:11

It would help if you would explain why you are thinking of changing your policy, and who has advised you to do so, if anyone.

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By JazzyD
09th Apr 2019 09:21

The directors want to change it because they'd rather see a big number in the month than the smaller number split each month.

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By GW
09th Apr 2019 10:02

Under the matching concept, if for some reason the income is brought in at the start you should be acruing the future expenses to cover the remainder of the 12 months.

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By JazzyD
09th Apr 2019 10:36

We don't have direct expenses against these sales, so it's more a case of if it's ok to report our revenue in this way

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to JazzyD
09th Apr 2019 10:45

You can report your monthly figures however you like, the only figures reported externally are the annual ones. They should show the prepaid income if the 12 month period is split between two years.

Though I suppose the effect of not showing it would be to pay your tax early so HMRC are unlikely to be too upset if you don't.

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09th Apr 2019 10:49

Yes, absolutely fine.

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By JazzyD
09th Apr 2019 10:57

Perfect, thanks all!

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By frankfx
09th Apr 2019 11:29

Changing the basis and timing of income recognition may have serious tax consequences.

It is / is it possible that earlier year accounts and the tax liability arising were wrong

Spreading income into later accounting periods when there is no contractual, accounting GAAP or tax justification to do so may be a concern to HMRC.

What do your external accountants and tax agents have to say.

You mention that the directors want to see a big number.

Well there may be a big number in the bank account.

Or a big number in debtors

Presumably a bigger number in the post tax profits mean that bigger distributable profits are available sooner.

Accounting policy change to correct errors :

Check that earlier years accounts were not erroneously prepared .

Your proposal may be to correct prior year errors...with the accounting consequences that follow

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09th Apr 2019 13:39

To the OP: Beware tongue in cheek answers.

Read Duggimon's first paragraph carefully.

Many software houses have gone down the swanny as a result of booking revenue too aggressively.

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09th Apr 2019 13:43

The correct treatment of this should be obvious based on the answer of this question.

If the customer gets all of the benefit on day one (when they can access all the data) why are they paying for 12 month contracts at all?

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By JazzyD
09th Apr 2019 13:54

Thanks @paulwakefield1 we do account like that at year end anyway, I've always liked to split it monthly to keep a consistent revenue instead of it looking like a roller coaster throughout the year.

@stepurhan they can only use that data for 12 months basically.

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By frankfx
09th Apr 2019 13:59

Contract?

So often there is no meaningful contract .

A cut and paste job dressed up as a contract .

IR35.... de ja vu?

The" Ramsgate Ferry" brexit planning company comes to mind.

Presumably the " licence " was to protect ownership and fair use of the data.

12 months gets slipped into the terms .

Accounts prepared on that " basis ".

And voila, a question is placed on this forum.

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By johnt27
10th Apr 2019 10:54

Have you read FRS 102 - there are revenue recognition examples in there that will provide the answer.

Based on the limited info in your post I can't see any reason why you could/should change your accounting policy.

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