BIM33175 - Stock: valuation: professional work in progress: reduction to cost or net realisable value

This guidance relates to accounting periods before the issue by the Accounting Standards Board (ASB) of Urgent Issues Task Force (UITF) Abstract 40 in March 2005. UITF 40 applies for accounting periods ending on or after 22 June 2005. Further guidance is at BIM74200 onwards. See in particular Appendix 2 paragraph 1 in BIM74275 in relation to the ICAEW’s guidance TAX30/98 (see BIM74130).

Valuation is the lower of cost and net realisable value

Many professional businesses record work-in-progress at selling price. Adjustments to this figure will depend on whether the correct accountancy treatment is to account for this as work-in-progress or as long term contracts. Where the work is properly regarded as work in progress it is necessary to reduce the book figure at selling price to arrive at the cost of work- in-progress. While there may be ‘rules of thumb’ which can often provide a reasonable approximation, the individual circumstances need to be considered, and ‘rules of thumb’ may not always be appropriate.

As with other judgements, the estimate of the net realisable value of work-in-progress should be made on the basis of the information available at the time the accounts are drawn up. Thus, where work is done on a speculative or contingency basis ('no win, no fee'), but it is clear at the time the accounts are drawn up that the case has been won and that the firm will at least recover its costs, work-in-progress on the contract should be valued at cost. Where, however, the contingency has not been satisfied at that time, so that there is still a reasonable chance that the firm will recover nothing, the net realisable value of work-in-progress is likely to be nil. For guidance on the recognition of income and contingent fee cases see BIM33185.