Income recognition issue

Problems with the recognition of income from previous years in a software company.

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We've inherited a client who provides software and has previously recognised income essentially on a cash basis.   The issue that we have now identified is that the income relates to services that cover a period of anywhere between one and five years.  No adjustment has been made for the deferred income in previous accounts and we are now looking to regularise the position.  Points to note:

1) the shareholder/directors have therefore drawn dividends based on the cash position.  If we calculate the deferred income as we understand this, the balance sheet is negative (although not significantly).

2) the contracts allow for no right of refund - and this is their argument for keeping the accounts as they are, which we are trying to explain isn't correct.

3) the directors understand that, at present, they have paid Corporation Tax too early.

To this end, is our only option to prepare accounts with a prior year adjustment to regularise the position or are we missing something obvious in respect of income recognition?  Any help gratefully received.

 

 

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By johngroganjga
28th Oct 2019 15:56

Just ask the clients what would happen if they stopped providing the service to a customer part way through the period. Would the customers be entitled to a refund then?

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By johnhemming
28th Oct 2019 16:58

If you are in software it is best to be careful about income recognition even in the management accounts as otherwise the information you are making decisions on can be shifting sands (having done this for decades). I don't know what are the general principles, but I have always wanted to be cautious about this.

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