Accounting & Assurance Services Case Studies
1) A question of performance
Client profile
Type: Private Company
Sector: Printing
Background: An owner managed business printed “free sheet” newspapers funded by advertising revenue. The auditors were concerned that the basis of income recognition and valuation of work in progress were no longer appropriate in the light of UITF Abstract 40 and that it might be necessary to spread the income over the period in which the magazine was produced.
Solution: MAS examined the substance of the contractual obligations to advertising customers and concluded that the company could only be regarded as having performed its obligations at the point the newspapers were printed. A review of costs included in work in progress identified that most were not costs of production and, therefore, should not be treated as an asset on the balance sheet.
Outcome: The company’s existing income recognition policy was confirmed as appropriate under Application Note G to Financial Reporting Standard 5. Work in progress was restated. The audit firm was supplied with a report that gave a detailed analysis of the accounting principles that were relevant, including comparisons with other companies in the same industry, to support the advice.
2) License to display tax
Client profile
Type: Owner Managed Business
Sector: Scientific Research
Background: A small scientific research company was in dispute with the tax authorities over the correct period in which to recognise a compensation payment. The payment had been received from a former licensee of a process because the licensee had failed to exploit the license over an extended number of years. The tax authorities claimed the receipt was an adjusting post balance sheet event under SSAP 17. The company had recorded it as a non adjusting event, disclosed in the notes to the accounts.
Solution: MAS reviewed the original licensing agreement and the process of negotiation to terminate it. We identified that there was no legal right to compensation and the payment received from the licensee was an ex gratia amount. Further, it was clear from the correspondence that the payment had been offered and agreed entirely after the year end.
Outcome: The Inspector of Taxes was persuaded that the receipt represented a contingent gain at the year end in accordance with FRS 12 and could not be recognised until receipt was certain. The company was able to delay recognition of the receipt until the following year when the money was reinvested in deductible expenses.
