WIP calculation

Poodle

Hi

Would it be correct to account for LTC's and WIP under SSAP 9 as follows:

Costs on the LTC debited to P & L as they occur e.g wages and materials.

At the end of the accounting period work out attributable profit as value of contract less expected costs X percentage of work completed. (i know there are other ways of getting this figure but this is the method selected)

The attributable profit is then debited to WIP on the B/S and credited to sales.

There would be no other entries as no part payments are received or invoiced and there are no expced losses.

Should the costs go somewhere else?

Help

Poodle

peugeot

Hi,

It wouldn't be debited to WIP it would be shown under current assets under stock and WiP, but before trade debtors, as "amounts recoverable on contract".

In respect of the costs incurred todate it would depend on whether the costs incurred are incurred before or after the "critical event" i.e. the date on which the right to payment for all or part of the contract arrived. If the costs were after this date then account for them as normal WIP, if they were before, or incurred on the date the right to payment arrived then just do what you were doing above.

Kind regards
Steve

Poodle

Steve

I am feeling really thick here:001_wub:

The right to payment occurs at the point of invoicing the sale ie at the end of the contract, so with this I will not actually have a WiP figure then for LTC at the Y/E only the 'amounts recoverable' figure on the BS?

That would make it a lot easier with salaries and employers NI as some contracts are labour only.

I presume also that this figure is just reversed once the actual contract invoice has been raised, or increased if the contract goes over more than one accounting period?

Poodle

peugeot

Hi,

If, at the balance sheet date, there was a right to receive payment in respect of the contract then you would include it as 'amounts recoverable on contract' and post the credit to sales. In other words, if the year end is 31 March and the contract was complete at that time or we could have invoiced it at 31 March but, in fact, we invoiced on (say) 23 April then you would credit sales and debit ARoC because at the balance sheet date, we did have a "right" to receive payment, even though we did not invoice until some time after the year end. UITF 40 provisions looks at when we "could" invoice and when we "could" receive payment for it even though we might not invoice until the whole contract is complete and our obligations under the contract fully discharged.

If the contract does straddle two accounting periods, then it would depend on the terms of the contract as to whether the ARoC figure is increased or deferred until the next period. Usually if the contract is complete, but remedial or cosmetic work is yet to be done, then you can just include the full amount of the contract in one year depending on the value. Once the invoice is raised, then you would normally reverse the year end provision in the next financial year to avoid "double counting" the sale (dr sales, credit ARoC).

Conversely, however, at the balance sheet date, if a right to payment had not arisen (for example if the contract was still ongoing and conditions in the contract state rights to consideration arise upon suitable completion - thus obligations not yet being fulfilled) then you would do the normal WIP calculation and include it as normal as WIP in the B/S and as a credit to cost of sales.

Kind regards
Steve

Poodle

Got it !!:thumbup::thumbup:

Thanks as usual

Poodle