WIP OR PART OF SALES

WORK IN PROGRESS CALCULATION UNDER FRS 102

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Dear Members,

I need some guidance regarding the work in progress calculations. I have a client who is in construction industry. They basically do construction contracts for different sites through sub contractors. The work involves, renovating a building/school,etc. Their main service is providing Metsec and cladding works. 
They had some invoices for which the work was mostly done by year end but invoice issued after the year end date. 
I was looking at FRS 102 guidance and found the following:
Under Inventories section FRS 102 says

'This section applies to all inventories, except: (a) work in progress arising under construction contracts, including directly related service contracts (see Section 23 Revenue);

Section 23 Revenue then gives details of percentage of work completion criteria as below:

'23.22 An entity shall determine the stage of completion of a transaction or contract using the method that measures most reliably the work performed. Possible methods include: (a) the proportion that costs incurred for work performed to date bear to the estimated total costs. Costs incurred for work performed to date do not include costs relating to future activity, such as for materials or prepayments; (b) surveys of work performed; and (c) completion of a physical proportion of the contract work or the completion of a proportion of the service contract. Progress payments and advances received from customers often do not reflect the work performed.'

Now the question is, since its rendering of service company, the invoices for which majority of work was done before year end but invoices issued after year end, should that come under Work In progress or added to Sales and shown as outstanding debtors ? I am a bit confused at the wording of FRS 102, as I do know that normally in building contracts, work in progress is shown. But here, under inventories section, FRS 102, it does not apply to work in progress arising under construction contracts. Shall it be recognized as work in progress or Revenue ? 

Kind Regards,

 

Replies (2)

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By andrew1211
02nd May 2018 14:31

I would include as accrued income in debtors and turnover.

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paddle steamer
By DJKL
02nd May 2018 14:41

https://www.accountingweb.co.uk/any-answers/revenue-recognition-balance-...

This earlier thread may assist you.

In effect the inventory head carries those materials where a cost has been incurred which have not at year end been incorporated into the works at the balance sheet date,

so Dr Inventory Cr COS,

the percentage completion re the uninvoiced work done at year end is Dr Debtors (sums to be recovered on contracts) Cr Sales

So say you have a £100,000 contract on which you have completed say 50% (which includes used 50% of materials/purchased in services) but you have actually purchased £60,000 out of an expected total of £80,000 materials/services (75%), in effect when contract completes you expect to make £20,000. GP(100-80)

So re inventory you expect 50% completion to have consumed £40,000 of materials/services, so

Dr Inventory 20,000
Cr COS 20,000

So £40,000 costs recognised. (60-20)

Re the sales you have say to date actually invoiced only £20,000 to the customer, so re 50% completion you need to:

Dr Debtors (sums earned under contracts) £30,000
Cr Sales £30,000

(The 50,000 value of works on contract to date less the say 20,000 you have already invoiced the customer)

In effect the sales has the £20,000 you have invoiced and the £30,000 re the work in progress, so £50,000 and the COS has £60,000 purchases incurred less the £20,000 in inventory, so net 40,000

In effect the PL re the contract will be

Sales 50,000
COS 40,000
GP 10,000

You have accordingly recognised 50% of the expected £20,000 overall contract profit.

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