Revenue recognition and inventory valuation

Revenue recognition and inventory valuation

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Hi All

I have 2 doubts:

  1. it is about sales recognition. About 3 months before the end of the fiscal year, a wedding dress maker received an order from a client. Before the end of the year the dress requested was completed and the invoice issued. However, the dress was collected/delivered around 2 weeks after the end of the fiscal period. Should the sale be accounted for in the period when it was completed or in the following one? For sales recognition purposes does it make any difference the fact that the dress was collected from the premises of the seller or delivered to the client? Finally, is there a different/specific period recognition policy for income or corporation tax calculation?
  2. it is about inventory. I know that to evaluate finished goods or works in progress I have to include in the valuation all the production costs incurred to manufacture the products. However, should also be absorbed part of the depreciation of the fixed assets (machineries) used to produce or not? And again, for tax purposes should this depreciation be included in the value of works in progress/finished goods? In other words, does HMRC allow that?

Replies (7)

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Chris M
By mr. mischief
13th Jun 2012 07:11

depends

I think the first one depends on the policy.  My standard wording is as follows:

 Turnover represents the value, net of value added tax and discounts, of goods provided to customers.

If you are following this policy, in my view you don't recognise the sale in the year-end accounts.  The dress had not been provided and the bride could have insisted on re-work, rejected it totally, etc.

Inventory

It is standard practice in factory costings to include factory overheads in the costing of items, this will include an element of depreciation per unit which will normally be the expected charge for the year divided by the expected number of units of production - or the actuals where they are known and you are not using a standard costing system.

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By Steve Kesby
13th Jun 2012 12:14

A slightly different view

Revenue recognition under current UK GAAP is governed by Application Note G to FRS 5 and UITF40 (which are broadly comparable in their effect with IAS 18). It says that revenue should generally be recognised in line with performance of the contract.  At the year-end, your dressmaker has fully performed their contractual obligations.

This also ensures that the revenue is recognised in the same period in which the costs are incurred. Although if the revenue from the dress wasn't included as income, it should be included in work-in-progress (at it sales value under UITF40).

I agree that there is the possibility of the customer rejecting the goods, but that would be an adjusting post-balance sheet event (rather than a critical event on which the right to consideration is dependent and which would cause recognition of the income to be deferred).

The position shouldn't differ between corporates and non-corporates, as both are required to compute their profits in accordance with generally accepted accounting practice. S.25 ITTOIA 2005 and S.46 CTA 2009.

On the inventory point, as Mr Mischief says, it's perfectly normal for depreciation to be asorbed in unit values for stock valuation purposes, but the tax consequences have been established in the Mars/Grants cases (see BIM33190). The amount to be added back is the amount that falls as a cost in the accounts, taking into account stock movements.

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By The Innkeeper
13th Jun 2012 16:56

Is this homework

???

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Replying to liamoneill99:
By George Attazder
13th Jun 2012 17:21

Does it...

Change your answer?

The Innkeeper wrote:

???

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By The Innkeeper
14th Jun 2012 07:47

Well

no but normally homework questions have in the past been rapidly kicked into touch

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By ASG
14th Jun 2012 12:50

clarification

Just to clarify it was not homework question

Thank you very much for the kind and helpful answers

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By The Innkeeper
14th Jun 2012 12:55

my mistake

sorry

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