Hi, we have a situation where the previous accountant has recognized the final payment option in the HP and capitalized it and its all been through the books and depreciated fully. Now we have decided not to have the asset and therefore don't need to pay the final payment. How do we go about treating this as we have £3k sitting in the balance sheet as liability with other side already put through P&L. Do we reverse depreciation and put through P&L or as suggested by someone else raise a "sales invoice" to HP company and clear it that way and it still goes through P&L?
Was this treated correctly in the first place? In my opinion, all but the final payment option should have been capitalized and depreciated, with final payment liability remaining entirely in the balance sheet.
Its one of those questions with so many right answers.
Yes, the accountant could have used residual value but there is also an arguement very much backed up by current thinking around IFRS that all potential (not necessarily merely incurred) costs of asset acquisition must be shown and worked through the P&L from the outset to give a better view of the entities affairs (see IAS16, IAS17, IAS18 and IAS23 which little by little are being incorporated into UK GAAP via FRS101/102/105).
So, lets assume that there was nothing wrong with what the accountant did even though there were options to do it a different way. The asset has been over capitalised and too much depreciation has been utilised. Also more capital allowances will have been claimed than should have been.
To unwind the scenario, recognise the difference through the P&L as you suggest as income (seperate to normal revenue) so that the tax claimed on the excess capital allowances gets sorted out.
The issues now are purely accounting rather than tax.
Reduce current period depreciation for the asset to the adjusted asset cost. If this is not enough then prior periods depreciaton have been over claimed as well in which case such are balance sheet only adjustments as they do not relate to the current period.
You should now be in a position that :
1) Assets cost was the actual cost to the business.
2) Asset completely written off against depreciation
3) Extra profit adjusts out the excess capital allowances in the tax computation.
4) The extra profit carried to the balance sheet is balanced completely against the reduced carrying value of the asset and (if applicable) adjusted prior periods depreciation.
HTH,
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.
Thank you so much for this response. It is very helpful.
One other question, as this crosses year end but at that point we hadn't made the decision to not purchase, do you think that it would be ok to treat as suggested above and not make an prior year adjs?
To give some background info: year end 30th June 15. Last dep'n put through Aug 15. HP ends Sept 15.
You are basically changing the residual value based on circumstances known at the period end (that the asset would not be purchased) so a period end adjustment to the value of the asset (and creditors, and associated depreciation) for that period would not be amiss (#2).
You are also recognising immediately that capital allowances have been overclaimed which would bring forwards the final value gain which would increase your 14/15 tax liability
I don't know your tax circumstances and it might be a good idea to look into whether that is a good or a bad thing (assuming of course that the different in asset value is material to the business. £3k might not be that material to you (#1)).
As a side note to progress with the psuedo revaluation I would get it in writing from management that the asset is not to be purchased on completion of the finance agreement.
HTH,
shaun.
#1 Materialarity : If the amont is less than 0.5% of turnover, less than 1% of total assets and less than 5% of profit then the amount is probably immaterial.
#2 Opening balances : This revaluation is a change of estimate, not policy so there would be no requirement to make opening balance adjustments to the 13/14 figures for comparatives.
__________________
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.
