Prior year adjustments

Prior year adjustments

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Hi folks,

I posted this question before but had no responses as yet, hoping for some help if possible.

My client is a small limited company operating in heating and ventilation systems (construction industry). Obtains work from factories and local hospitals/hotels to install new systems or upgrade systems. Operating for nearly 30 years.

Director is reaching mid-60s and is in negotiations for sale of business to similar business in local area. The last accounts cover to May 2014 and show a large loss which will no doubt affect sale price negotiations. However it seems that this loss this year (c £60k) is overstated as opening WIP is overstated by approx £30k. Last years accounts show loss of £7k as they stand, so this would be £37k with a prior year adjustment processed.

From accounting perspective, I feel a Prior Year Adjustment is warranted with explanatory note. However I am wondering which would be best to help in the conversations regarding sale of the business - show large loss £60k this year and no PYA, or process PYA for lower loss £30k in 2013/14 and higher loss £37k in 2012/13 year? Both options will require a conversation with the possible buyer anyway and the PYA will require a disclosure note.

My worry is that price already quoted "subject to contract" was based on lower loss showing in 2012/13 year. Either way, I informed client that price will more than likely change.

I want to get this right from accounting standards perspective whilst also trying to keep client's other interests (i.e. best sale price possible) in mind.

All help greatly appreciated folks!

Replies (2)

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Euan's picture
By Euan MacLennan
14th Jul 2014 16:57

What are you asking?

If you want to get it right from an accounting standards perspective, I agree that a prior year adjustment would be appropriate.  I would think that a loss of £37k followed by a loss of £30k would be regarded slightly more favourably by the prospective purchaser than a loss of £7k followed by a loss of £60k, so doing the right thing is probably also the best thing for your client.  However, if I were the purchaser, I would not be paying much for a business which has lost £67k over 2 years, whichever way you split it.

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By TerryD
14th Jul 2014 17:08

Agree with the above, but - is it correct to show this as WIP anyway? If it is work done on specific contracts, then shouldn't you be bringing in the relevant portion of revenue and hence profits (unless the contracts are generating losses, in which case providing in full for those losses) and charging costs to date to cost of sales rather than including them as WIP?

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