Huge los of P&L - advisor wants to adjust - help!

catja

Okay - here I go again - ever wish you hadn't taken the job :thumbdown:

There is a farm which started trading this year and whose year end is currently March. This means they have masses of expenses both on repairs and renewals and on fertilisers but no income will be coming in of any significance until June/July, this is producing a P & L with a huge loss.

The advisor was saying we should take out the fertiliser and some repairs as prepayments to make it look better as this P&L would be commercial suicide if filed with company's house (regarding credit terms etc) and that there might be tax implications. He said it wasn't in line with the concept of matching.

I would really like to know what the correct thing to do is. The fertiliser was bought in my year, and used in my year and the buildings were repaired in my year.

I think asking for an extension of the year end to December would be good, but what do you do on a start up with this problem.

Believe me all answers will be very gratefully appreciated!!!!!!

peugeot

I think the advisor is referring to the now defunct SSAP 2, which has been replaced by FRS 18 (Accounting Policies).

The matching concept and the accruals concept were both the same thing in SSAP 2.

Financial statements are prepared on an accruals basis (per FRS 18). SSAP 2 also contained the prudence concept which said that all possible costs and liabilities had to be recognised in the financial statements regardless of whether or not sales were going to realise the costs incurred.

The advisor needs to look closely at FRS 18. I fail to see how you can prepay repairs and cost of sales that have been used within the company. You state that the fertiliser has already been used, so therefore it cannot even be classed as stock.

The prudence concept in FRS 18 is not as explicit as it was in SSAP 2 - the prudence concept, along with the consistence concept are desirable rather than fundamental (though they are not to be dismissed entirely). However, in this case it is prudent to follow the accruals (or matching) concept and recognise costs in the financial statements in the period which they relate. I would therefore disagree with the advisor's proposed treatment. FRS 18 states that financial statements have to be (a) reliable, (b) relevant, (c) comparable and (d) understandable. Failing to recognise costs in the period to which they relate would not achieve any of these four fundamental concepts of FRS 18 (or its FRSSE equivalent).

Extending the year end is an option, quite feasible - if it would benefit the client.

In terms of tax, then any trading losses can be offset against future profits - there's no problem here.

Kind regards
Steve

catja

Thanks Steve, I really felt uncomfortable with what he was saying but felt unable to challenge properly as he was ACA, but he has not practised for a while and I think the company are beginning to appreciate this. He was charging £600 per day to do the everyday books!

catja

How about the assertion that filing these accounts with companies House would be suicidal?

I'm not sure how this can be remedied apart from changing the year end.

As the client is a farmer I think this would be beneficial anyway

peugeot

To be honest I think referring to filing financial statements showing a loss as 'commercial suicide' is a bit over the top! There are lots of companies that make losses but then return to profitability. Most newly formed companies will have to build up their reputation anyway which in turn will build up their credit rating!

Kind regards
Steve