I ask because I don't deal with tax (yet) but have been asked where a client might find a definitive answer to this:
He is a management consultant. He starts work and sends an invoice for an advance payment, both in March of FY10/11. The invoice was paid and the money went into his bank in May FY11/12.
Because of other factors, it is advantageous for him to account for this income in FY10/11. Is he within the rules to do so? As he had started work and sent the invoice during that period, it would seem right to me, but ..... ?
this goes back to the basic accruels concept that a financial event is recognised as it occurs, not when cash is received or paid. (see IAS8 or FRS18).
If the consultant worked the month before their year end then event happened in that period, not when the money was receieved after their year end.
As it's nine months before the financial statements need to be in you will know whether the money was receieved shortly afterwards so no need to build in an accruel.
In short, it is correct that the payment should be recognised in the accounts for 2010/11
Hope that this helps,
Shaun.
P.S. edited to take out references to tax as this is a financial accounting rather than tax concept and to refer to tax just confuses matters.
-- Edited by Shamus on Thursday 19th of May 2011 07:06:20 PM
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Just hope that the examiners for ACCA paper P2 see my skills the same as you!
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I read that line completely differnetly but I see what you mean.
This is the problem when your sitting at a PC rather than sitting around a table going through things like this.
I read it as the management consultant started work in March and the work that he's invoiced for was done in March but the payment for the work was requested in advance of the month end so as to attempt to be paid in March (which apparently didn't happen and hence the cunnundrum).
If this is actually a long term contract and payment based on a percentage completion basis (per IAS11 and SSAP9) then of course your right and different recognition criteria come into play (there would still be some of it in March).
Back to you Andrew. I thought it was cut and dried but we need more info on what was meant by advance payment.
I'm not around too much in the morning but should be able to pick this up again mid afternoon unless Tony (or Bill sweeping in from left field) answers it before then.
Talk later,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
The job he's being paid for has been under discussion with the (prospective) client for about 6 months. It could easily last for another 6 months, which is why stage payments are built in to the proposal, starting with 50% of the projected total in advance. The proposal was made at the end of Jan this year and the client formally accepted it mid-March. Work started towards the end of March and the invoice for the 50% stage payment was raised at the same time. The rest is as mentioned before, except for the fact that it won't be finished, probably, before November. Other invoices will be raised along the way.
this scenario is a bit different to the one that I thought I was answering.
Where we are dealing with long term contracts the portions of the contract are recocnised in relation to their stage of completion and in the financial statements of the period to which they relate.
SSAP9 states three things in relation to the recognition :
* 1. Income is recognised as it is earned. -
That is when goods are delivered or services provided.
* 2. Income should be recognised at the same time as the expenses incurred to earn those receipts -
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.
* 3. Income should not be recognised before the point when their ultimate realisation can be assessed with reasonable certainty.
So if there is a question mark as to whether the money will be receieved it is not recognised.
Unfortunately SSAP9 requires the accrual of attributable profit into long-term contract values but it does not give detailed guidance on how the amount is actually to be computed.
Take a look at BIM40090 for the HMRC take on this (it's only a short one). Here's a link :
I'm afraid that he key line in the above seems to be "Recognition in the profit and loss account of profit means that profit is realised and not anticipated".
Sorry, I'm afraid that for this one I am no expert and have no personal practical experience of the tax treatment. Hopefully the above will help a little and fingers crossed Tony, Phil or Bill might have more experience in this area.
Right, really have got to go now.
Talk later and sorry about the earlier confussion where my answer related to a completely different type of scenario.
All the best,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I'm not an expert in the area but I think the basic premise is the "Degree of Completion" of the contract.
Personally I would estimate the percentage of total work done in March and recognise that amount e.g if the contract was for £12,000K and takes a year I would recognise £1,000 per month (assuming the work done is spread evenly).
I think it's a bit of a subjective area, particularly in a service industry. If you compare it with, say, building a bridge - where you can get a Surveyor to value work done to date.
Perhaps, "reasonable" subjectivity is your clients friend - but bear in mind my signature
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Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
I think you're right - subjectivity reigns, especially in his line of work (operational risk management)! I've been going through some of the case law and that seems to confirm the line he's taken. There is enough logic that, if he was challenged as to why he accounted for income in 10/11 which he'd billed in 10/11 as a result of being engaged and starting work in the same period, he can argue his side well enough.
