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Suit Hire Company Stock or Fixed Asset?

Previous acountant had analysed suits for hire as Stock not fixed assets

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Thanks for reading and I hope you can assist with this challenge I have.

Recently picked up a new client whose trade is hire of suits,. The balance sheet shows a stock of suits for hire of some £50k. Now my questions are as follows :-

1) Should these really be shown as fixed assets as they are generating an income?

2) If they they are fixed assets,this means AIA's haven't been claimed historically. Is AIA available this year on reclassification of the £50k? It would be impossible\very difficult to find the year of purchase and adjust the corresponding previous years tax returns. 

3) Should we make a prior year adjustment within the accounts

 

 

Replies (21)

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By The Dullard
15th Nov 2019 12:38

Type "knives and lasts" into Google and see what you think.

EDIT: Essentially, I think your client has (and always had) a revenue expense for their hire suits. Any proceeds received on disposal of such suits should be deducted from such expense, IMO, rather than carrying them as an asset.

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Replying to The Dullard:
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By Grizzler
17th Nov 2019 09:24

I don't think the situation is the same as the knives were consumables used in production of goods. The suit hire generates rental income see HMRC BIM33045 and could be classified as fixed assets..

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Replying to Grizzler:
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By The Dullard
18th Nov 2019 10:41

Do they last more than 2 years or not? If not, HMRC do not regard it as capital expenditure qualifying for capital allowances. CA2110.

In Hinton V Maden & Ireland, which I was referring to, the (consumable) sole knives and making and finishing lasts had a life of three years, and were considered to be capital expenditure, whereas the upper knives had a live of only one year and were not. BIM35415.

The test for accounting purposes is, of course, whether the expenditure benefits more than one accounting period.

Given that you can't claim AIA for historic expenditure, what do you think is best for the client?

One thing that we are agreed on is that they are not stock. The alternative is to say that they have a sufficiently short life to warrant writing the expenditure off. After all, if a fixed asset has an actual value below its carrying value (cost less depreciation) then it should be impaired. You won't get revenue relief for either the depreciation or the impairment, and, as I say, you can't get AIA for historic expenditure. I know what I'd do

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Psycho
By Wilson Philips
15th Nov 2019 14:24

I have three dress (as in the general use of the word) hire clients, all three of whom treat their hire stock as exactly that - stock.

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Replying to Wilson Philips:
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By Grizzler
17th Nov 2019 09:09

Thanks for replying Wilson, I'm not certain if they should be classified as stock see HMRC Bim 33040.

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By CJaneH
15th Nov 2019 16:59

I had a similar problem many years ago with Video Films. My boss had decided the tapes were stock, but valued at cost! Accounts were showing a profit for the first couple of years. I discussed the life of the tapes with the client and decided on a valuation policy for the stock, written off over three years. I had to redo the prior year accounts and get tax assessments adjusted. Fortunately in the days of local tax office and letters and there was no problem. The said lady soon finished trading as there was little or no profit.

Whether fixed assets or stock the suits need to reduce in value to reflect their life, both wear and tear, accidents and fashion.

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Replying to CJaneH:
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By unearned luck
16th Nov 2019 14:34

Its not a similar issue.
The OP's problem was the mistaken belief he was looking at fixed assets.
Your problem was a failure to apply the then GAAP of valuing stock at the lower of cost and NRV.

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Replying to unearned luck:
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By Grizzler
17th Nov 2019 09:23

Thanks for replying but I'm still not sure that it should be stock, if you look at HMRC Bim 33045, it states that items purchased for the express use of generating hire income should be classified as capital rather than stock.

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Replying to Grizzler:
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By WhichTyler
18th Nov 2019 11:26

On average, how long do they last before they are sold off as 'Ex-Rental'?

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Replying to WhichTyler:
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By Grizzler
18th Nov 2019 14:31

That's a good question, I would estimate between 5 and 10 years

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Replying to Grizzler:
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By JoF
18th Nov 2019 14:39

Seriously? Do they not hire them out very often then?

I have clothes in my wardrobe from 12 years ago that are still ok to wear, but mostly because I havent been wearing them every week.

I think you need to be asking them the question.

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Replying to JoF:
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By Grizzler
18th Nov 2019 14:48

I think you are right, I need a more accurate picture of the longevity.

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Replying to Grizzler:
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By Tax Dragon
18th Nov 2019 14:39

What are they, deep sea diving suits?!

(Sorry, Roland.)

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Replying to Tax Dragon:
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By Grizzler
18th Nov 2019 14:46

That made me chuckle..

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By Tax Dragon
17th Nov 2019 08:30

Reading BIM35415 might help you understand some of the replies a little better.

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Replying to Tax Dragon:
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By Grizzler
17th Nov 2019 09:23

Thanks for replying, I had a look at your reference but could you lead me to the relevant points?
I've had a a look at BIM 33045 and it states that goods for hire could be classified as fixed assets.

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Psycho
By Wilson Philips
17th Nov 2019 10:29

Whatever treatment you decide upon AIA will not be available for existing stock.

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By fawltybasil2575
17th Nov 2019 14:12

@ Grizzler (OP).

1. The company’s trade being the hire of suits, the suits should normally have been treated as Fixed Assets.

2. A Prior Year adjustment appears the best approach (but consider the alternative of re-doing previous years’ Accounts, if practicable).

3. Given the nature and size of the business, I would have expected that it would be difficult to function efficiently WITHOUT maintaining detailed records of the suits (including style, sizes etc.). I would thus ask the company again if such records are held. In the absence of such records, an element of “educated guesswork” may be required.

3. Capital Allowances. The normal time limit for an AIA claim is two years after the end of the accounting period- that time limit may be extendable if HMRC accept that exceptional circumstances apply (see CA11140). One cannot, to answer directly your question (“Is AIA available this year on reclassification of the £50K”) simply NOW claim the AIA which should have been claimed previously (unless of course the company started trading in the last couple of years and thus comes within the “two years” rule referred to above).

3. I would (after obtaining the written authority, if needed, of the client company) ask your predecessors as to their reason for treating the suits as “Stock” (such term being appropriate only if the suits were purchased for resale).

4. You will of course ascertain the basis of valuation of the “Stock” per the last Financial Statements.

Basil.

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By paulwakefield1
18th Nov 2019 11:33

These extracts from Moss Bros' accounting policies may be useful:

"COST OF SALES & INVENTORIES.......The classification of hire inventory as property, plant and equipment is discussed in the property, plant and depreciation accounting policy. All inventories are finished goods."

"PROPERTY, PLANT AND EQUIPMENT
..........Hire inventory 2 – 7 years

Hire inventory is held as property, plant and equipment and depreciated over its estimated useful life. The classification differs from other inventories held as the assets are retained by the group and hired to customers on a short-term basis."

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By Roland195
18th Nov 2019 11:39

Nothing to contribute to this thread other than to say how refreshing it is to see a genuine accounting issue and a lively yet professional exchange of views on the subject.

Hope no-one ruins it by trying to say Grizzly should be making a SAR though.

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By The Dullard
18th Nov 2019 14:42

It sounds as though the existing stock should be appropriated to fixed assets at market value, which should be estimated conservatively.

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