Hello,
This is new subject and I need some help please. I am trying to figure out how to estimate and how to include in my accounts provisions for repairs (haulage business ). Should I base my estimates on previous 12 months ? ? Do I create provision for sum of all repairs from that period ? Also, if I create managmnet accounts every month, should I compare estimates with new 12 month period and make adjustment ? I cant figure out which account other than repairs expense account would be involved ? I bet, I need to create provision account for repairs ( Balance Sheet ) but would that be contra account for creditor ? Also, if anyone here has any experience in transport industry, what other provisions would be useful for this type of buisness ? ( other than provision for doubtful debts of course )?
Thank you
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You might want to include provisions in the management accounts. That is between you and whoever is using those accounts to discuss.
But, unless there are known repairs required at the accounts year end not yet provided for, I would not include in annual accounts. Past history of repairs does not create a commitment to future repairs. That is dependent on post year-end events (breakdown of a particular vehicle).
There being a potential tax angle, HMRC of course has a view. OP might be interested to read the comment on Johnston v Britannia Airways Ltd in BIM46550. (But I read the question as being about management accounts. What stepurhan said makes sense to me in that regard.)
(But I read the question as being about management accounts. What stepurhan said makes sense to me in that regard.)
If we're just talking management, what would make more sense would be a realistic planned maintenance schedule, spreading not only the cost but the work.
There's only so many wagons you can repair at any one time.
I thought that about Britannia Airways Ltd. Why weren't the lumpy costs smoothed out by spreading the work? (But what do I know about flying?)
I thought that about Britannia Airways Ltd. Why weren't the lumpy costs smoothed out by spreading the work? (But what do I know about flying?)
Holidays ? Covid ?
Not what people usually do.
And certainly not allowable as a tax deduction
Not allowable under UK GAAP either...
Not allowable under UK GAAP either...
I think that is the basis for both
Not what people usually do
and
And certainly not allowable as a tax deduction
You'd have a job justifying a provision for future repairs out of present income, however I suggest back to basics and think about matching income and costs. On what basis can you bring forward next year's expense into this year?
At a stretch there could be a circumstance to do this if say you've bought a truck to satisfy a five year contract. Client pays you on a flat-rate basis but you know repair costs will get higher as the truck clocks up miles and gets older. You could do a calc of total repair costs over five years at agreed mileage, divided by the number of months/years of the contract. Still not a slam dunk though, depending on your legal status you have to satisfy both accounting (possibly easier) and tax (definitely harder) rules on general provisions.
Unless major I would expense as you go.
In various roles, although not currently, I have worked with companies with substantial fleets of large vehicles.
So, whilst costs may be analysed per vehicle, and maybe depreciation charged per mile rather than over time, I have never sought to anticipate future costs into the current period.
Has everyone misunderstood the question? Did you mean to ask how you estimate current year costs in current year management accounts?
I'd just show YTD figures as whatever they are, but prudently project the full budget being spent by year end, unless there is evidence that the budget will be under or overspent by the year end.
You are looking down the telescope from the wrong end.
If a vehicle is on a long term contract then rather then accruing expense you need to be looking to defer income to cover future anticipated losses on the contract cause by maintenance cost being back loaded.
Absent a long term contract there is no justification for delaying the profit recognition, as you could avoid the expense by disposing of the vehicle.
Now what that last thought does to your depreciation policy is interesting. Personally I am in favour of at least 50%RB on all vehicles.