It’s a common issue and area of confusion and it has tax implications. WIP is valued at the lower of cost or net realisable value but Debtors whether invoiced or not are valued at Sales Value, uninvoiced Sales are shown as Amounts Recoverable on Contracts within Debtors.
Here is an example from HMRC
A joiner contracts to create fitted bookcases in an office for a total price of £15,000. He purchases the timber (materials cost £6,000) and builds the doors in his workshop. He also prepares the timber for the rest of the structure in his workshop. He then builds the skeleton of the bookcases on the customer’s premises and attaches thereto the timber that he has already prepared in his workshop. What is the accounts treatment if his year end occurs after he has prepared the timber and the doors but before he has gone to the customer’s premises to build the skeleton and fit them?
The contract is a single contract and the joiner should recognise revenue according to the stage of completion of the work. It is not relevant whether the work is done at his workshop or at the client’s premises. Neither is it relevant that part of the contract can be regarded as ‘goods’ and part as ‘services’: both are treated in the same way for accounting purposes.
Let us assume the joiner assesses that he has done 1/3 of the work by the year end and he has used half of the timber and other materials. The calculation would be: total price £15,000 less materials at cost (£6,000) leaves £9,000. Assuming the profit attaches only to the labour, accrued income is £3,000 (1/3 complete) plus materials at cost of £3,000 ( a half used), a total of £6,000. The remaining half of the total cost of the materials (£3,000) is work in progress. These figures should then be adjusted to reflect any likely losses, discounts, delay in payment or cost of difficulties expected to arise in completing the contract. Any progress payments received should be treated as creditors in accordance with SSAP 9.
http://www.hmrc.gov.uk/manuals/bimmanual/bim74270.htm
Also further guidance at
http://www.hmrc.gov.uk/helpsheets/hs238.pdf
So do you have Work in Progress or Amounts Recoverable on Contracts?
steve@bicknells.net
Steve – The length of the contract is the determining factor as to whether this would be Work in Progress or Amounts Recoverable on Contracts.
A ‘long-term contract’ is usually one that extends for more than a year and would therefore be accounted for with the latter method.The example appears to be a short term contract which would recognise the profit at the end of the contract (Completed Contracts Method) and would be accounted for as Work in Progress at the balance sheet date.
The over-ride to this as always is materiality and whether the size of any short term contract that overlaps the year end is such that omitting the attributable turnover and profit would result in a distortion of the figures.
Hope my view on this helps.
Chris
Hi Chris – thanks,
What about this scenerio – a client places an order for work at an agreed fixed price but it can’t be invoiced because of the clients internal sign off procedures. The work is complete, the value is certain but the invoice can’t be raised without client reference numbers.
My view is that in this scenerio Amounts Recoverable on Contracts is the correct treatment. Debtors feels more appropriate than WIP.
Appreciate your input
Steve
Here is an example from http://www2.accaglobal.com/pubs/members/publications/technical_factsheets/downloads/130.pdf the example relates to audit and tax work
If work on an audit, a tax return or a set of
accounts is 50% complete at the year end then in principle 50% of the estimated revenue should be recognised as a
debtor and accrued in the accounts, whether this has been invoiced to the client or not. Service providers will therefore
no longer have any work-in-progress, but in its place there will be more revenue and more debtors. This increased
revenue and therefore profit will feed through as increased tax liabilities of clients and practices.