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Work In Progress

Sales Value or at cost

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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.

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By johngroganjga
14th Oct 2018 22:00

If you “don’t get involved in the preparation of accounts” why are you “looking for some clarity” on this?

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By GW
15th Oct 2018 00:26

Why don't you talk to whoever prepared the accounts you are looking at?

It comes down to when you recognise a sale, try reading the accounting policies note in the accounts.

If you look at the Profit & loss account at the year end and taking a very simplified view:

If you are saying there has effectively been a sale that hasn't been invoiced - Credit sales (increasing sales) and Debit WIP with the sales value of the work done (but not yet invoiced).
If you are saying the sale hasn't happened yet Credit Cost of Sales (reducing the cost of sales) and Debit Stock/WIP with the costs incurred.

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By Jigs
15th Oct 2018 06:36

Sorry, post should have read I do not currently get involved in the accounts prep, but my role is changing going forward. I have prepared accounts in the past but not for many years.

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Replying to Jigs:
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By Accountant A
15th Oct 2018 10:08

Jigs wrote:

Sorry, post should have read I do not currently get involved in the accounts prep, but my role is changing going forward. I have prepared accounts in the past but not for many years.

Your employer should be providing training for you. It's unfair on you - and your clients - to expect you to pick up the knowledge that you need for your job from some random internet forum.

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By atleastisoundknowledgable...
15th Oct 2018 08:01

1. There’s a couple of ways of doing this. I’ve seen the profit estimated over the length of the build and accrued income & accrued/prepaid costs as required. Equally I’ve seen just the cost on the Balance Sheet and all the profit in the period of sale.

2. The cost needs to be in the same period as the sale. If the sale is recognised on signing of the contract, you should accrue whatever the estimated costs are at that point, then release to the P&L as they’re invoices. If the sale is recognised on completion, then all costs should be prepaid and released on completion.

3. Prepay all costs and defer all income until the event. Accrue any further expected costs.

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By atleastisoundknowledgable...
15th Oct 2018 08:07

.

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By paulwakefield1
15th Oct 2018 08:47

Have a look at Section 23 of FRS102 and the subsequent examples. It addresses a lot of the issues you raise.

https://www.frc.org.uk/getattachment/69f7d814-c806-4ccc-b451-aba50d6e8de...(March-2018).pdf

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