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Is a business rates prepayment an asset?

Does the expense have to be paid before you have a prepayment?

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We get invoiced for business rates at the start of the year then pay over 10 months, so in our AP ledger we have a declining creditor/liability. The business rates "invoice" goes to prepayments, and is transferred to P&L over 12 months - a declining asset.

Is the reporting here wrong? We have effectively the same item (albeit declining at a different rate) inflating our assets and our liabilities, and affecting our working capital ratio.

I think I've always accounted this way - treating an expense as prepaid when it hasn't necessarily been paid (just invoiced). Business rates is the obvious example but we get invoiced for various things in advance that are often sat unpaid on AP (based on 30 day terms) while we show a prepayment asset.

I'm being told by German HQ that we must offset the prepayment against liabilities to get the accounting right.


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23rd Jul 2019 08:54

You are right that your current approach is not joined together, although not exactly wrong. The instruction you have had from head office will of course correct the problem.

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23rd Jul 2019 08:55

With business rates I tend to:-

1. Arrange for them to be paid over 12 months rather than 10.
2. Just take each payment to P&L.

Saves all that you have outlined.

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23rd Jul 2019 09:16

I think your approach is fine (both from accounting pov and practically), by extension of your 30 day example. If I have a 30day liability to pay a year's insurance premium, I would expect to see the full amount in PL/AP/Trade Creditors while it is unpaid, and a reducing balance in prepayments.

Sucking prepayments out of PL each month would be hellish!

But I'm not sure my view will help you with the boys and girls from Heidelberg...

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23rd Jul 2019 09:22

To answer the broader question, no you don’t have to have paid a supplier to prepay the expense. As for the ‘guidance’ from your German head office, I disagree. Netting off like this is generally frowned on as the full liability exists whether or not you choose to prepay part of the expense.

Mr/s Wanderer’s solution is pragmatic but strictly, the entire rates amount is due on 1 April and payment by instalments is a concession.

Thanks (5)
By johnt27
to paul.benny
24th Jul 2019 11:00

Totally agree and both IFRS and FRS102 don't permit setting off unless you tick specific boxes, not relevant in this case.

The request from Germany will be to do with their local reporting requirements and will be a consol/group reporting adjustment that is needed.

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to johnt27
25th Jul 2019 06:03

I don't quite follow your answer - it's not permitted but it's needed? To be clear they are asking for the offset in local and group reporting.

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to jpwattam
25th Jul 2019 08:10

Local reporting = UK statutory accounts. They must be prepared in accordance with the relevant accounting standards. Probably FRS102 for your company.

Group reporting= whatever your parent company instructs. I am surprised that German reporting has different requirements. But if that's what they say, so be it.

Incidentally, German accounting is familiar with the concept more than one set of numbers and companies will often have tax books as well as statutory. This is to do with differing requirements and not dishonesty.

Thanks (1)
By neversc
24th Jul 2019 11:37

As the word “prepayment” suggest the expense must be paid before it can be classified as a prepayment. A simple test is whether the amount classified as prepayment could be legally demanded from the debtor. Clearly if there was not payment then no demand can be made and hence no “current” asset exist at that point.

Many business face this problem with business rates, estate charges etc which is billed in full in advance (sometime more than one year) and paid periodically based on agreed contractual terms.

I would suggest that you create a special “prepayment control account” in your ledger to book payment of this type to. This will allow for me easy identification at the end of each reporting period. The debit balance should be offset in full against your AP Control account. This should be done as a reversing journal each month and the process repeated monthly where a balance exist at the end of the reporting period.

In summary, the request from you German HQ is legitimate and valid. Hope this provides the explanation you need.

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to neversc
24th Jul 2019 11:53

neversc wrote:
…. A simple test is whether the amount classified as prepayment could be legally demanded from the debtor. Clearly if there was not payment then no demand can be made and hence no “current” asset exist at that point.

That's just wrong. "Prepayment" is an application of the matching concept, normally referring to deferral of expenses incurred in advance.

Amounts reported as prepayments do not usually relate to a debt that can be recovered from another party.

Thanks (1)
By JoF
to neversc
24th Jul 2019 12:20

neversc wrote:

As the word “prepayment” suggest the expense must be paid before it can be classified as a prepayment. .

So by that argument...
Year end say 30 June. You receive an invoice for rates on 1 April, it is not paid at all. The expense is carried in the P/l to 30 June for the full 12months worth of rates. How can that be right?

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to neversc
25th Jul 2019 06:21

Glad I'm not the only one finding this response incorrect. If the prepayment cannot be demanded, how can it possibly be offset against a creditor that CAN be demanded?

I may be stuck with a technical solution similar to what you've suggested - extra work every month which really isn't necessary (I've suggested a system solution) and is more confusing than the 'problem' it seeks to solve.

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By trecar
24th Jul 2019 13:07

I would be inclined to agree that your treatment is correct. IAS 1 specifically requires the accrual basis of accounting and prohibits offsetting unless permitted by another standard. That would rather suggest that your German HQ must be applying a local standard rather than a UK or International one as another commentator has pointed out. As long as the accounts used in the UK comply with UK requirements then providing Germany with accounts per their requirements is their responsibility not yours. Had a similar problem myself many years ago with the US parent of the company I worked for. They deferred to me on local requirements but I had to meet their SEC requirements.

Thanks (2)
24th Jul 2019 16:26

Your way is the easy way

The german way is the way I as FD want it done so assets and liabilities are not over stated.

Our Audit dept said we as auditors prefer gross and no netting off but they are both ok as they also invoked the great god of materiality.

So in my opinion. If both is allowed, follow group policy as the over ride.

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