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Late delivery of projects penalties

How to treat a supplier payment of a penalty for late delivery of a project in the accounts

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A supplier has agreed to pay a penalty (contractual) as they have accepted that they are at fault for late delivery of a project.

I'm not sure how I should treat this receipt in the accounts.  Should I treat it as other/miscellaneous income, or set it against the costs of the project? I can see merit in both as;
*  Treating as other/miscellaneous income keeps it separate from the project costs and is transparent in what it is for.
*  Treating as a reduction in project costs makes sense because that's effectively what it is doing, but then it also disguises that there's a penalty involved. 

I'm leaning towards treating as other/miscellaneous income, but wondering if there's a norm that is applied in these situations or is either approach ok?

Replies (11)

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By Duggimon
03rd Jun 2021 15:56

I never net off, even if one thing is directly attributable to the other.

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By Paul Crowley
03rd Jun 2021 16:11

Similarly not keen on netting off.
I would put to other income
That way easy to spot a few years down the line, and does not upset standard trading patterns and statistics.

Remember all the threads looking to set CJRS against wages?

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By tom123
03rd Jun 2021 16:18

Are they giving you a credit note, or are you raising a sales invoice to them?

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By J.McQ
03rd Jun 2021 16:21

It's a credit note.

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By tom123
03rd Jun 2021 17:55

For me it depends on scale. If it is a credit note, then one could consider it just 'money off' the job.

Does this happen often?

One off / £1k or so, I would just be reducing cost of sales.

£10k - might be thinking differently..

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By J.McQ
03rd Jun 2021 18:59

It's not a £1k or so in a sort of goodwill gesture. It's a contractual penalty for late delivery of a project, and it's in the realms of materiality to the accounts.

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By paulhammett
04th Jun 2021 06:47

Other income for the reasons already provided by others.

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By Bobbo
04th Jun 2021 08:27

I'm in the 'reduction in project costs' camp - because that's what it is.

Under the contract the supplier was due £x but this was subject to a reduction of £y if they missed deadlines or whatever.

They missed a deadline and now their entitlement under the contract is £z (being x-y)

I think this scenario is very different to the idea of setting CJRS against wages.

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By paulwakefield1
04th Jun 2021 09:01

Is this capital or revenue? I too am in the costs reduction camp; even more so if it is capital but could possibly be persuaded otherwise.

What were the consequences of the delay? Cost overruns? Lost revenue?

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By WhichTyler
04th Jun 2021 09:06

Did you capitalise the project costs? If so I would reduce cost of acquisition (cf accruing retentions)

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By J.McQ
05th Jun 2021 02:53

Thanks all for your replies.

I'm going down the route of other/miscellaneous income with this. I've been having a look at the standards as well and the best I can fall back on from them is IAS 37 on contingent assets. It's more geared towards insurance claims/legal proceedings. But, since this is a penalty charge, I think it fits the bill for that (even though we haven't had to go down the route of legal proceedings to enforce it).

As it's 'virtually certain' that the supplier will pay the penalty, then under IAS 37 on contingent assets, I can put it through the accounts as income.

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