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Income recognition

Income recognition

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Two years ago we had a customer pay deposits against a machine being manufactured in the UK. The deposits were in Euro and totalled 1,111,500 Euro representing 95% of the machine which when translated at the bank came to £839,556 (implied rate of 1.324). However, the customer went belly up and we held the deposits in the balance sheet at a year end rate of 1.1255 bringing the creditor up to £987,561 in our books ( as this could be the exposure if asked to repay deposit). After discussions with the administrators the machine is now being sold for 58,500 Euro which at todays euro rate (appx 1.13) is worth approximately 51,770.

Question is, when the machine is taken to turnover should it be recognised at 51,770 + 987,561 or 51,770 + 839,556 (and a 148,005 fx gain in the P&L)?

Any guidance and thoughts appreciated.

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Teignmouth
By Paul Scholes
04th Jul 2011 21:36

Depends on invoice value I think

Hi - I think you may first have to record the contracted for invoice value, in £s or €s with the latter at an average rate or the rate determined by your accounting policy.  This will give you a sale value against which you set the £987.5K b/f (which is now fixed in stone) and the £52K received.  From what you say you are likely to have a surplus which I would record as fx gain.

If however you have a loss I would, on balance, treat that as a bad debt as you have already recorded fx losses when building the creditor up to £987.5K.

Having said all that it doesn't sound neat & tidy, but it's near my bedtime, so maybe a younger/fresher brain can apply itself.

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By La BoIS Saint
04th Jul 2011 21:38

Consider how you would account in sterling

My suggestion would be to consider how you would account for it in sterling and then use appropriate f/x rates at relevant dates. I'm a little unclear as to the timeline. Has the same machine been sold twice?

-- Keith

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By ianmac1961
05th Jul 2011 10:07

Income recognition.

Hi Keith,

The same machine has not technically been sold twice although I can understand why you might think so. The original sale was to an intermediary company who paid the deposits. We built the machine (about two years ago) and so when the intermediary company went belly up we kept the deposits and also kept the machine. Now the deal with the company who was to be the eventual end-user and who has effectively paid up (via contractual obligations to the intermediary company) will pay the remaining 5% to secure delivery and title to the machine.

My feeling is that as the deposits were revalued at the year end  I will have to take that revalued amount as the 95% value (stated in GBP) to add to the smaller 5% sale occuring now. The original sale had forward contracts based on the higher euro exchange rate but obviously these have been closed out and any exchange gains/losses booked at the time (two years ago).

It is my boss who thinks that the sale should perhaps be booked at the original contract exchange rate (although he admits to not being sure). My view is that the contract was effectively nullified when the customer when under and that and exchange gains and losses have been crystalised and reported in prior year accounts. The only thing that we have is the creditor carried forward which at its revalued amount is what I believe we can recognise as being part of the sale.

 

Hope this clarifies.

 

Cheers

ian

 

 

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By ianmac1961
05th Jul 2011 10:10

Income recognition

Hi Paul,

Thank you for taking the time to reply so close to bedtime. I believe you have the same thoughts as me in so far as the creditor figure brought forward is now set in stone as you put it.

 

Cheers

Ian

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