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Valuation of Work in ProgressThe Inland Revenue have issued Help Sheet IR233 - THE 'TRUE AND FAIR VIEW' FOR PROFESSIONS AND THE 'ADJUSTMENT' ON WITHDRAWAL OF CASH BASIS. This covers in detail the Valuation of Work in Progress The full document can be obtained by clicking on the following link:Click here to download Help Sheet IR 233 It emphasises the importance of looking at the individual figures concerned where the book figure is valued at Selling Price. "Many professional business nowadays record Work-in-Progress at Selling Price. It would be conceptually wrong to value it at such a price when computing taxable profits. It is therefore necessary to reduce the book figure at Selling Price to arrive at the Cost of Work-in-Progress." It points out that SSAP2 "...prohibits the carrying forward of current expenditure to the extent that it is not recoverable. If a Fixed Fee has been quoted for a job the value of Work-in-Progress will not exceed that fee less the estimated costs that will need to be incurred to complete the job." Both the above quotes are taken from page 4 of the Inland Revenue Help Sheet IR233. Click on the link above to download. Discussion Point: Valuation of Work in Progress for longer term contractsLonger term contracts are often a major part of turnover and valuing a contract at any stage of completion at it's cost to date presents it's own inaccuracies. If one takes the costs to date at any stage of the project as the work in progress value, there could still be a rather large change in turnover when the project is completed (if no account is taken of income until then). Should a proportion of overheads be included within such a work in progress valuation? The situation becomes even more complicated if, as with the vast majority of contracts, payments are received from the customer over the life of the project. What value of work in progress, if any, should be used in such circumstances? Certainly, as soon as any income is received for a contract, valuing work in progress at 'costs to date' also becomes inaccurate. So how should work in progress be valued in such circumstances? A 'true and fair view' of Work in Progress may require some longer term contracts (which may be less than one year in duration) to have income (and as a consequence, profits) spread over the life of the contract. This could be calculated on a 'percentage completed' method. Say, for example, that the overall project is valued at £100,000 The first valuation (25% complete) was £25,000 value of Work in Progress £25,000; you received income of £23,750 (they kept a 5% retention) value of Work in Progress £1,250. Your second valuation (50% complete) was £25,000 value of Work in Progress £26,250 (£50,000 less £23,750); you again received income of £23,750 value of Work in Progress £2,500. Your third valuation (75% complete) was £25,000 value of Work in Progress £27,500; you again received income of £23,750 value of Work in Progress £3,750. When the project is complete, your final valuation is £25,000 (total £100,000) value of Work in Progress £28,750. This time you receive £26,250 leaving a total retention of £2,500 for the project. An alternative treatment of the above over the life of the project is to treat each valuation as being income and included within turnover figures, with the amount of the retention at any stage (be it 2.5% or 5% or whatever) being shown as an asset in the Balance Sheet. H M Customs and Excise certainly favour the latter as they would then gain the benefit of the VAT on the full valuation each time, except in cases where the VAT was calculated on a cash received/cash paid basis (Cash Accounting). This method takes no account of work in progress at all! So are we back to square one? T. Bookman
Limited - Company No. 4389244
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