Deferred income - The Book-keepers Forum (UK)

Stardoe · Guru

Deferred income

MarkS · Expert

Hi Pauline

Just wanting to get dates right

Money was paid in Aug 2010
Course was due to be taken Sept 2010

Year end is Aug so at the moment the sale is in the 2010 accounts (as the money was received in Aug 2010) but your client wants to defer the income into the year ended Aug 2011 as the course was in Sept 2010.

Dont see any reason why you cant defer the income as effectively your client has received a deposit for the course a month early. In fact i would argue that it makes more sense to defer the income into next year as this is when the service was provided. Will also mean the tax on the income is deferred for a further year which the accountant should be considering.

It may be that from a VAT viewpoint that the VAT should be accounted for in Aug (not sure of tax points for when money received in advance of service and invoice date) but this is separate from deferring the net income in the next accounting period.

I would question why you cant defer the income into 2011 accounts. I would certainly recommend your client to do that. (and so should their accountant as a tax deferring option)

Regards

MarkS

Stardoe · Guru

Hi Mark,

Thanks for the quick reply. You got the dates right...Client received the money in Aug 10 for service due to start in Sep 10 and she wishes to include the income in the Sept 10 to Aug 11 financial year. I thought it would make more sense to defer the income to the next year as well, but didn't want to argue with the accountant. She told me that if she earned the money in that year then it should be included in that year and that the tax point is the earliest of invoice date, work carried out or money received.

As far as the VAT is concerned, the client is on cash accounting for VAT so it has been included in the relevant Qtr.

Pauline

-- Edited by Stardoe on Saturday 12th of March 2011 09:58:29 PM

MarkS · Expert

Hi Pauline

The point is that she didnt earn the income in the 2010 accounts. She earned the income in the 2011 accounts as this is when she provided the course. In the 2010 accounts she has received a deposit from a customers for a service to be be provided at a later date and dont think you could get a better example of income that should be deferred.

If you think of it the costs to her of providing the service are most likely to be incurred in the same month as she provides the service therefore under the matching concept the income should be deferred into the 2011 accounts to be matched against the costs.

Regards

MarkS

annepebo · Veteran Member

Hi all

Difficult to comment without knowing the individual circumstances of the client. For instance what did the accountant prepare - trading accounts or self assessment tax return?

As far as I am aware, and I do stand to be oorrected, the only time a tax point can be the date money is received (within a business) is if you are using cash accounting for VAT. Having said that, that is just for the VAT and shouldn't affect the financial statements . I beleive the date of sale in the accounts should be the date the goods or service is provided (or invoiced) surely

Seems to me by including it in the year prior to the year the services are provided you are overstating profits for that year.

However I'm used to dealing with Ltd company accounts, if this a very small enterpise (for instance just self employed income) the payment could conceivably be deemed as income for income tax purposes (like wages paid ??) Maybe the tax point in this case refers to income tax. Just a thought

Wella · Expert

I would have said that it is deferred income, as the pre-payment has only created a future obligation, and a creditor on the balance sheet.

According to HMRC website, for tax, they use UKGAAP which does not have a general standard of income recognition but apply FRS 5 (G), which very basically says that "Provides that a seller recognises revenue when it obtains the right to consideration in exchange for its performance."

My take on that is that the pre-payment is just an obligation, the right to the consideration, only occurs when the course starts ie when the right to the consideration has been earned.

Bill

-- Edited by Wella on Sunday 13th of March 2011 10:50:44 AM

Shamus · Forum Moderator & Expert

Hi Bill,

hope that your well. great to see a bit of accounting theory creeping into a thread.

There's an interesting discussion on revenue recognition over on the Accountancy Students website. Have a look here :

http://www.accountancystudents.co.uk/news/read/revenue_recognition/

I'm just going through the anguish of converting from UKGAAP to IFRS (excellent book is Applying International Financial Reporting Standards (ISBN 978-0470819678) with whole chapters on what is Revenue... And that questions not at all as straight forwards as it sounds!!!!).

Anyway, the International equivalent to FRS 5 reporting the substance of transactions is IAS 18 Revenue.

But that's a whole other story. Back to UKGAAP. Application note G (specifically paprgraph 20) states that where a seller receives payment in advance they recognise a liability that obligates future performance . Until the obligation has been performed the seller carries the balance in their books as a creditor (which is the same as you said).

For any other readers interested in application note G have a look here :

http://www.lawsociety.org.uk/documents/downloads/revrecogappnotegtofrs5.pdf

Talk later,

Shaun.

Wella · Expert

Hi Shaun

I'm great, thanks, how's you?

I try to keep my hand in, on matters of theory.

All the best
Bill

Stardoe · Guru

Hi all,

Many thanks for all your replies. My client is a small Limited Company and the accountant has just prepared her end of year accounts. I tend to agree with the fact that this money should be included in the 2011 accounts and so treated as deferred income. So, how do I go about arguing with the accountant so as not to offend her? hmm

Wella · Expert

A real tricky one hmm

I would make 100% sure of the facts before I raised it with the accountant

The reference to Tax Point surely relates to VAT only?

Is it obvious to the accountant that the receipt is for a later accounting period. I am guessing that the accounts are not audited, which will mean that the accountant will probably take the books on face value as presented, without any enquiry, unless an unusual activity is blatantly obvious, or is pointed out to them.

Have you seen a copy of the final accounts? and confirmed that it has been included. Maybe the client is getting confused with VAT and Corporation Tax.

It may be that the accountant missed it, completed and filed the accounts, and is reluctant to change them. Having said that, your client would have signed the accounts off.

Once you are sure of the facts, it is easier to present a case.

Bill

Stardoe · Guru

Hi Bill,

I have seen the accounts briefly, but wouldn't be certain that the amount was included, but assume it was. No, the accounts are not audited and the accountant probably did take the books on face value. The client is in Essex and the accountant has recently moved to King's Lynn in Norfolk, so I just sent her the Trial Balance, P & L and Balance Sheet, and other reports she asked for.

I will tackle it on Tuesday when I am next in. Many thanks for all your help everyone!

Pauline

AccountantsCircle · Senior Member

I don't think there's anything tricky about this at all.

Quite clearly the income is earnt in Sep 11 and should appear in that period. No problem with invoice, VAT etc in Aug and all that's needed is a reversing journal to move it from Revenue in August to Deferred Income and back again in September.

The only questions would be 'what has the accountant done?', 'if not correct, can it be easily changed?', and 'if it can't be changed, can it simply be reflected correctly in management accounts?'.

That's all I can see.

gbm · Guru

This clearly comes under the matching principle. I would guess that the accountant didn't want to change because:

- they had everything printed off and didn't want to redo everything (not really an excuse)
- the amount was small (can't see it mentioned anywhere, but for example if it was £100, the tax relief we are talking about is £21)
- they don't understand, which is more worrying.

Or a combination of 2/3 of the above.

Merlion ABS · Senior Member

Under the Accrual basis, the income is earn't in September, therefore the the income should be treated in September for accounting purposes regardless of whether the invoice is raised iin August or the cash is received in August.

I would say that it is correct to provide a provision for deferred income.

As gbm states, probably due to the small amount (if it is small) the account felt it was not a material issue and therefore not worth adjusting for.

Also, in the balance sheet there should be total for the deferred income is it has been provided for correctly. I would have though it would show in the notes for the accounts if anything.

attilabenko · Guru

That is a difficult one (actually,not really).
According to HMRC if a deposit is paid but the goods or services have not been provided then it is not appropriate to recognise that deposit on receipt, the income should be deferred.
Have a look at HMRC's BIM31080, they do mention UK GAAP but they did say before accountancy theories and practices such as UK GAAP, IFRS, FRSSE are only there to provide reasoning, they are not really relevant for them, the only thing what matters is tax law. In the case soemthing isn't clear in that, than they go back to the applied GAAP,etc. or to the relevant case law (whichever suits THEM more).

attilabenko · Guru

Also if VAT was involved HMRC most probably wants the VAT in the first VAT returns after tax point - reason behind it is you collected VAT from someone so you should not hold on to it for long ( if you are on annual VAT it could be more than a year if you don't include it). So in accounts deferred income but VAT has to be adjusted, you cannot defer this part, only the income.

Stardoe · Guru

Hi everyone,

Sorry, I thought I had mentioned the amount (or I was going to and then didn't). The amount was £2440 (can't remember if this was gross or net, but I think net). It's not because the accountant had printed everything off and didn't want to re-do as she was waiting for a response from my client as to what the query was before she finalised the accounts. I haven't seen the notes to the accounts, just the draft accounts themselves. I will drop the accountant an email now and let you know what she says

Many thanks again.

Pauline

Stardoe · Guru

I think the accountant is getting a bit annoyed with me now....she's just sent back this (obviously copied from somewhere...maybe HMRC website).

Date invoice is issued	Time of Supply (tax point)	Effect of full advance payment
Before the date the supply takes place	The date the invoice is issued	If payment is received before the invoice is issued, time of supply (tax point) is the date payment received

Not sure I want to argue any more....maybe I should let the Client know and leave it up to her?

Pauline

attilabenko · Guru

Hi Pauline,

Yes that is for VAT purposes and agree that is vat HMRC say:
http://www.hmrc.gov.uk/vat/managing/returns-accounts/tax-points.htm

But for income purposes see BIM31115 of HMRC:

Income should be recognised at the same time as the expenses incurred to earn those receipts

This may imply that income should be deferred, if the entity will have to incur expenses to earn that income in the future, or that costs should be carried forward, when they will earn income in the future. For example if a deposit is paid but the goods or services have not been provided then it is not appropriate to recognise that deposit on receipt, (see BIM31110 for more on deposits).

http://www.hmrc.gov.uk/manuals/bimmanual/BIM31115.htm

Also probably it isn't worth to argue and if it's included in the accounts, all taxes paid than it's done and over...but if there is a choice to include or not than it should be up to the client which to choose and not up to the accountant.
I would just let it go but reply to the accountant telling her the one above and your interpretation of it. Obviously ;) stating that she is probably right, your concern is based on the above but she is the accountant so you trust her opinion as she is the one who is signing the final accounts together with the client...
I don't think HMRC would argue the case whichever way you choose.

Stardoe · Guru

Many thanks Attila. I will have a word with my client tomorrow and see what she wants to do. I will point her in the direction of the link to BIM31115.

Many thanks everyone who replied

Pauline

AccountantsCircle · Senior Member

I still don't see this as any sort of grey area. The income quite simply belongs in Sep and not in Aug.

Either the conversation with the accountant may be slightly misunderstood and discussing different points (ie VAT or Revenue), the details of the income itself aren't clear or correct, or the accountant simply doesn't understand one of the basic and fundamental concepts of accrual accountancy.

gbm · Guru

Pauline, if the accountant still doesn't get it, there are plenty on here that do!!! smile

Stardoe · Guru

Lol....many thanks Nick! I may persevere tomorrow. Maybe it is that she has misunderstood what the client and I are trying to convey. I'll speak to the client tomorrow. Thanks everyone for the support!

Pauline

Merlion ABS · Senior Member

lol its pretty worrying when the client has to tell the accountant what to do!

MarkS · Expert

Hi Pauline

If they were my accountant I would be looking for another one. The accountant should be there to give proactive advice, one of which is to reduce tax and certainly there is a tax saving by deferring the income which i think most on here agree isnt in dispute. In fact i would state that it is totally wrong to include the income in the 2010 accounts. Unless of course the costs related to the course were incurred in the 2010 accounts which is unlikely given the course ran in Sept. This goes back to the fundamental concept of matching. Income to be matched against the costs related to generating the income.

The accountant isnt auditing the accounts and isnt giving an opinion on them. At the end of the day it is your clients decision whether to include the income, not the accountant's. Even if the accountant disagrees with your client then the amount isnt material that they should be bothered either way.

Your client's accountant shouldnt be seen of someone to be frightened off. Your client is engaging their services to act on their behalf, no on behalf of HMRC.

Regards

MarkS

ADAS · Guru

The "accountants" a crank

edit: what are the "accountants" creditentials? Professional body?

-- Edited by ADAS on Tuesday 15th of March 2011 09:35:42 AM

Stardoe · Guru

It's not that I'm frightened of her..lol I guess I just don't like confrontation and am of the opinion that she must know more than me!

Tony, her credentials are FMAAT and FCCA.

Pauline

Come to think of it, she has sent the client her invoice for doing the June 2009 - Aug2010 accounts (client changed yr end) dated 8th March 2011 and asked me to accrue for it in the accounts dated 31st August. Is this correct? Suppose it could be if it relates to work done in the next financial year for the previous financial year. (Beginning to lose the will to live now...lol)

-- Edited by Stardoe on Tuesday 15th of March 2011 10:21:28 AM

gbm · Guru

Hi Pauline,

Yes it is usual to accrue for accountancy fees in the year, even though the work will invariably be done after the year end.

With those qualifications - well all I'm saying is that she should know!

ADAS · Guru

Stardoe wrote:
Come to think of it, she has sent the client her invoice for doing the June 2009 - Aug2010 accounts (client changed yr end) dated 8th March 2011 and asked me to accrue for it in the accounts dated 31st August. Is this correct?

Firstly, to answer your question, its correct to accrue the accounting costs. I appreciate you maybe doubting yourself but try not to..Pauline.

Secondy, if the Accountant understands the concept of accruals, how can they treat deferred income wrongly.

The only possible logic I can fathom, and it's still wrong btw, is if the accounts where prepared on a cash basis?

-- Edited by ADAS on Tuesday 15th of March 2011 10:56:23 AM

Stardoe · Guru

Thanks Nick. Thought it probably was right. Yes, she is certainly well qualified

Pauline

Dalbir · Senior Member

One of the first things in accounts school I learnt was the matching concept - which states revenue and related expenses are recognised in the same period.

Wasn't it Worldcom that inflated their share price by inflating their income by using unallocated revenue?

Dalbir

Stardoe · Guru

Hi Guys,

Tony...I'll try not to doubt myself too much....do it a lot actually....not good!

When I sent her the reports I asked whether she wanted them on a cash or accrual basis, and she said accrual, so they were prepared on an accrual basis

Anyway, she has now agreed that we can move the income if we want to...so the client probably will.

Thanks for all your input guys, didn't know this post was going to generate so many replies!

Pauline