Cost Value Reconciliation and Cost Value Comparisons are used on construction projects, they are essential if you want to keep project on budget and report costs and revenue correctly.
The CVR not only looks at costs to date and sales revenue to date but also brings in committed costs, forecasts, contingencies, scope changes, stage of completion and forecasts.
There are two types of Revenue Valuation, Internal (for use with the CVR) and External (application for payment), what gets certified with the client is unlikely to be the true internal value. There may also be items disputed with the client.
The CVR then results in adjustments to both Revenue and Costs to give a true reflection of Profitability.
Costs should not be under estimated and Revenue should not be over estimated within the CVR.
The CVR is great tool to highlight spend issues early on and take action with the client to keep within budget.
Here is an example CVR from the Template Store Cost report template (online-templatestore.com)
The case of Mark Smith v HMRC  TC02321
The appellant in this case was trading as a builder who provided ground works for construction companies. He had an in house surveyor who produced his applications for payment, the clients surveyor certified the valuation within 3 weeks and the accountant recognised the value when certified. The contracts were fixed price and lasted up to 12 months, The business started as a Sole Trader and was subsequently incorporated.
HMRC opened an enquiry in 2001/2002.
The central issue before the tribunal related to the appellant’s computation of profits. It was admitted that his accounts understated the profits gained in a particular tax year. However, it was his contention that this was a “one-off”.
The tribunal held that HMRC’s assessments were in fact justified.
The reason why HMRC were successful was that in the case of Mark Smith he based his income on certified revenue, this meant that the profit was understated, within Construction “UK GAAP” requires revenue to be reported on application based on the CVR matching approach.
The details of the additional profits and tax for each year are as follows:
(1)2000/01: additional profits of £43,189 giving rise to tax of £17,275.60
(2)2001/02: additional profits of £65,205 giving rise to tax of £24,972.02
(3)2002/03: additional profits of £73,889 giving rise to tax of £27,737.86
(4)2003/04:additional profits of £70,023 giving rise to tax of £27,503.41
(5)2004/05: additional profits of £70,000 giving rise to tax of 27,704.18
(6)2005/06: additional profits of £65,240 giving rise to tax of £26,735.44
(7)2006/07: additional profits of £45,541 giving rise to tax of £18,671.81
Further guidance is in UITF40 which came in 2005 and basically stated revenue should be reported in line with work completed by the seller.
Under the principle of matching costs and revenue should be aligned.