I work in a tax department and therefore do not get involved in the preparation of accounts. I am looking for some clarity around the correct way to treat work in progress for a variety of clients, I have been given conflicted advice so would appreciate any further help or even if someone could point me towards some legislation/guidance in this area.
My understanding is that for long term contracts which stagger your year end, you should consider the percentage completion of the contract and apply this to the sales value of the contract after adjusting for any amounts invoiced on account. However, surely any contract which staggers your year end is by default a long term contract and if a contract doesnt it isnt releveant?
Which types of businesses would value their wip at cost rather than sales value?
I have listed below three examples and my thoughts and would appreciate any help:
1. Developer builds 15 houses which were all incomplete at the year end. All were sold and exchanged post year end and therefore these should be recorded at cost? Does this mean that a large housebuilder such as Barrets would only show profit in the month in which they exchange contract for each property or are they required to provide for profit earlier for some other reason?
2. Company manufactures bespoke furniture. They would only manufacture such furniture if a contract with a customer had been signed but if the job was incomplete at year end, how would WIP be valued?
3. Events company - income is mainly sponsor income but also some delegate income. A lot of customers will pay well in advance and a lost of expenditure is incurred prior to the event they are holding, the only contract they have is for their sponsors to sponsor the event and delegates to attend.