UK How do you account for a potential purchase of a large piece of equipment

[Fay40]

Hi,

I was accruing £200k each month for a piece of equipment on the income statement. I was advised to do this until the business decided whether to make the purchase or not.

The business chose not to make the purchase so I released the accrual on the income statement, inflating the profit for the period. I know this is the incorrect way to do things but some accountants hold accruals for a rainy day.

What is the correct way to account for a potential purchase of a fixed asset? Or do we not account for something which may not happen?

Thanks in advance

 

[kirby]

The latter. You do not accrue into existence an asset you do not have.

 

[Fidget]

There used to be a time when, under UK GAAP anyway, it was absolutely fine to 'hold accruals for a rainy day', or in other words, create a general provision. But it was being used for profit-smoothing - ie syphon off some profit in the boom years, and then release it back to the P&L in the not so good years, which was basically creative accounting.

Then the standard was revised and that practice was pretty much outlawed by the revised version. So these days, you can only accrue/provide for something that you have a legal or constructive obligation to honour, and it must be as the result of a past event, can be reliably estimated and is more likely than not to be paid out.

So bang goes any idea of saving for a rainy day in your accounts.

 

[Fay40]

Thank you both for your responses.

Very helpful.