An accountant friend and I have a long-running disagreement on what classifies as prepayment, or more specifically when you recognise a prepayment, particularly at year end.
I think if an invoice is received for services for a number of months ahead of the current accounting period, the invoice is treated as a prepayment at the point it is recorded to the ledgers and the expense realised. My friend thinks a prepayment can only be recognised if the invoice is paid and settled to the supplier.
Example: A company has a January to December business year. The company receives a £30,000 (+ VAT) invoice in December 2012 for 6 months support services fees to 30 May 2013. The invoice remains outstanding at 31 December 2012 and is fully settled on 15 January 2013.
My opinion is that the fees for January to May 2013 (i.e. £25,000) are treated as a prepayment in the 2012 accounts because the expense relates to future accounting periods.
My friend says that since the invoice was unpaid at 31st December it cannot be classified as a prepayment (asset) because under IFRS the £25,000 cannot be deemed an asset to the business.
I argued that their thinking would lead to the expense account being overstated in December 2012. However they countered that the invoice should be recorded to the January 2013 ledgers and the £5,000 fee amount for December be accrued in December.
Could some please help clarify the situation? We have been having the same disagreement for some years now and it would be great to know who is right or wrong.
Thanks in advance.