Recognising Income

FOR MOST BUSINESSES, INCOME RECOGNITION does not pose any problems. 

Income is recognised when a transaction is recorded with the certain expectation that payment has or will be received.

For most businesses, income is recognised on  the same date sales are made, which also tends to correspond to the date the sales invoice in raised.

For many other businesses, recognising income is no where as straight forward as that. For example, if;

• income is received prior to the goods being dispatched, manufactured or services performed,
• the services to be performed straddled more than one accounting year,
• there is some degree of uncertainty associated with the receipt of payments
• there are contract approval processes which are complex or under dispute

Left entirely to most directors, decisions to recognise income may not reflect the transaction in a clear unbiased fashion.

Accounting standards

To address this ambiguity, accounting standards which are usually derived from General Acceptable Accounting Practices (GAAP), have been established and adopted to guide the process of  income recognition. There are a couple of these, some of the most popular being;

1. IAS 18 Accounting Policies, Changes in Accounting Estimates and Errors
2. SSAP 9 Stocks and Long Term Contracts
3. FRS 5 Reporting the Substance of Transactions
4. UITF 40 Revenue Recognition and Service Contracts

As you may deduce from their headings, each of these cover different elements and scenarios associated with income generation for a range of business entities and transactions. However, they seldom cover every scenario, and sometimes conflict with other standards.

We could go into detail here, but the only party really likely to make a fuss as to when income is recognised is HM Revenue and Customs, because of the impact it ihas on the tax liability. For this reason, it is worth knowing whether an entity’s income is being recognised at the correct point in the trade cycle.

Get advice

Each case is different. If in doubt it is well worth getting some advice. The first point of call should be your accountants; given their knowledge of your business, they should be able to advice you without charging you an arm and a leg for what we generally consider to be routine advice.

About the author: Egbert Johnson FCCA is the Audit and Accounts Manager at Adams and Moore Chartered Certified Accountants. For more information and enquiries contact egbert@adamsandmoore.co.uk

Business Secretary seeks to cut red tape for small business – Good news and Bad news

In a recent Mansion House speech, Vince Cable the Secretary of State for Business outlined his vision of the audit and accounts requirements for small companies. Notably, Mr Cable will like to see:

• Small and medium sized businesses exempt from audit
• Companies with turnover and assets less than £2m exempted from the requirements to file accounts.

Mr Cable is not alone. Generally, law makers’, not just in the UK but across Europe believe that the statutory filing requirements for small and medium sized businesses are an undue burden to small and medium-sized businesses.

Assuming Vince Cable gets his way, over 75% of UK companies  that currently file their accounts will no longer be required to do so. This in theory, should translate to reduced accountancy fees, which if it happens in practice, is great news for clients.

Now the not so good news

This is unlikely to become law anytime soon. Mr Cable does not yet have enough backing in Europe to see his ideas through to statute, nor can he expect to pass them through the UK parliamentary system without the backing of the accounting professional body’s pressure group.

Judging by recent developments in de-regulations however, it may well be just a matter of time before these changes make it to law. The big question is; when they do, will the savings be passed on to clients?

At Adams and Moore, we have reviewed our entire clients services portfolio. Where possible we have reduced clients’ fees by providing clients with adequate training so that they can maintain some of the non-accounting tasks associated with fulfiling their statutory requirements.

About the author: Egbert Johnson FCCA is the manager responsible for Audit and Accounts at Adams and Moore Chartered Certified Accountants. For more information contact Egbert@adamsandmoore.co.uk

Audit Exemption Thresholds

Egbert Johnson FCCA, A&M Audit & Accounts Manager writes

I find the audit exemption threshold a very confusing concept for non-accountants. In my experience, whenever a query regarding the threshold comes up, most people tend to respond by asking,

“is it the 2 out of 3 criteria?”.

No. Actually, when you talk about audit exemption criteria, 3 out of the 3 pre-conditions need to be met to qualify for audit exemption.

Companies seeking exemption must:

• Qualify as ‘small’
• Have a turnover of not more than £6.5million
• Have a balance sheet total of not more than £3.26million

The confusion seems to lie with the first pre-condition. To qualify as a small company, a company must meet 2 of the following 3 criteria:

• The average number of employees must be 50 or fewer
• The balance sheet total must £3.26million or less
• Annual turnover must be £6.5million or less

Other considerations

Having met the minimum requirements to quality for exemption, the company’s articles and memorandum of association should not include any stipulation overriding the exemption.

It is important to note that even when all these criteria are met, the exemption will not be granted should the pre-requisite proportion of members move or vote for a company’s accounts to be audited.

About the author: Egbert Johnson is the manager responsible for Audit and Accounts at Adams and Moore Chartered Certified Accounts. For more information contact Egbert on Egbert@adamsandmoore.co.uk