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Prior year adjustment

Prior year adjustment

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I am preparing ltd co accounts to July 2012.

The company has been trading since Aug 2009 and another accountant did July 2010 and 2011 Y/Es.

Unfortunately they treated a finance lease as a rental, ie charged 20K of payments to P&L each year. There are another 20K of payments in 2012 too - finished July 2012 too. So they've paid 60K for eqpt worth 42K. Title was transferred on August 2012.

I think this should have been capitalised and interest and depn charged to P&L. Well myself and the client want this to happen as it will increase reserves, profits etc for his own personal mortgage requirements.

I want to do a prior year adjustment to disallow rental charge in 2010 and 2011 accounts, capitalise from the start etc. I think I need to change the 2011 comparatives. Do I need to change 2010 too? Do I physically need to send any accounts anywhere (HMRC or Co House) - I don't think so, although will make full disclosure to HMRC at the current time.

I know about where to put the PYA bit in the 2012 accounts, and the SRTGL note, but physically can it all be done on the 2012 accounts??

Any help please.

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Euan's picture
By Euan MacLennan
17th Oct 2012 11:41

Change of accounting policy

Whilst we may think that the previous accountant was wrong to apply the accounting policy he did, this is a change of accounting policy in the 2012 accounts which does not require the prior years' accounts to be amended at Companies House.  You can process the adjustments in the 2012 accounts with disclosure of the change of policy and of the the adjustments.

For tax, I think you need to amend the CT returns for 2010 and 2011 and you will need to reverse the PY adjustments to the 2010 & 2011 computations in the 2012 computations.

 

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Replying to tom123:
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By HeavyMetalMike
17th Oct 2012 11:49

Thanks.

So I just credit rental expense with 40K, Dr Fixed assets, Dr Depn with 3 years worth and loan interest with three year's worth all in the 2012 accounts??

I accept it is a change of policy. But we'd rather like to increase profits each year too. For tax I don't think there will be anything further to pay for 2010 and 2011 due to SP3/91 - the first thing I learnt in tax so will need to check can still use!! - claim relief on a payments basis.

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By compliant
19th Oct 2012 12:55

I do not agree that this is a change in accounting policy!

If you have looked at this relationship and it passes the test as being a finance lease then what you have is an accounting error which must be treated as such.

Your prior year adjustment should just be dealt with in the 2012 accounts with relevant amendments made to the PY comparatives. There is no need to go back and revise the 2011 accounts provided you include all the relevant details regarding the nature and impact of the error in a separate note in the financial statements.

Please note that prior year adjustments should only be made for errors that have a material and fundamental impact on your accounts (this assessment is somewhat subjective) If the error is not so significant then just deal with in it the current year.

The tax impact is probably going to me more difficult to deal with/explain I suggest that you utilise the commentary section on your tax return to explain this matter and the impact on the return.

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By AdShawBPR
19th Oct 2012 14:50

Reserves could be worse if a finance lease

The P&L charge for a finance lease is depreciation and interest which tends to front weight the charge to the P&L so would make your reserves worse than the rental.  Depends on the lease term and your depreciation policy of course.

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By La BoIS Saint
19th Oct 2012 15:09

HP?

If title passed (to the company I assume) in Aug 12 then are you sure this isn't an HP agreement with CA implications? The whole point of FL arrangements is that title doesn't pass.

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By AdShawBPR
19th Oct 2012 15:32

Good point on HP...

It's also a very short term for a finance lease which could be correct if computer equipment or something similar but La BoIS Saint could well be right...

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