Is their any requirement for a limited company to make allowances in
its accounts for sums which *may* become due under the the Late
Payment of Commercial Debts Act?

Company A has provided services to Company B on a regular basis for
several years and has always emphasised its right to claim late
payment charges, although it has never actually claimed them. They
have six years from the creation of the debt (ie from when each
invoice became overdue) to claim the charges. If they claim these
charges now the figure would be something over £16k.

It is not unreasonable to assume that Company B has many other
suppliers in the same position - in fact I'm aware of two others and I
believe there are many more.

Company B's latest accounts show Shareholders' Funds of c£21k. If
claims for all outstanding late payment charges were to be made I
would envisage a liability of at least £35k and possibly over £200k.

Should Company B be recording their potential liability every time
they pay a supplier's invoice and making allowances for potential
claims on their balance sheet?

--

Andy

On 16 Jan, 14:46, Andy Lord  wrote:
> Is their any requirement for a limited company to make allowances in
> its accounts for sums which *may* become due under the the Late
> Payment of Commercial Debts Act?
>
> Company A has provided services to Company B on a regular basis for
> several years and has always emphasised its right to claim late
> payment charges, although it has never actually claimed them. They
> have six years from the creation of the debt (ie from when each
> invoice became overdue) to claim the charges. If they claim these
> charges now the figure would be something over £16k.
>
> It is not unreasonable to assume that Company B has many other
> suppliers in the same position - in fact I'm aware of two others and I
> believe there are many more.
>
> Company B's latest accounts show Shareholders' Funds of c£21k. If
> claims for all outstanding late payment charges were to be made I
> would envisage a liability of at least £35k and possibly over £200k.
>
> Should Company B be recording their potential liability every time
> they pay a supplier's invoice and making allowances for potential
> claims on their balance sheet?
>
> --
>
> Andy

I would say not.

See FL Memo extract:

" 7.  Provisions, contingent liabilities and contingent assets

6228The requirements under this heading do not apply to leases,
deferred tax, and retirement benefits for which there are specific
requirements (dealt with above in ¶6162 ¶6207, and ¶6220
respectively).


6230 FRSSE 11.2
A provision should be recognised only where it is more likely than not
that a present obligation exists as a result of a past event, and that
it will require a transfer of economic benefits in settlement that can
be estimated reliably. The amount recognised as a provision should be
the best estimate of the expenditure required to settle the obligation
at the balance sheet date. Where the effect of the time value of money
is material, the amount of a provision should be the present value of
the expenditures expected to be required to settle the obligation.
Where discounting is used, the unwinding of the discount should be
shown as "other finance costs" adjacent to interest.


6232 FRSSE 11.3 - 11.  5
Where some or all of the expenditure required to settle a provision
may be reimbursed by another party (for instance, resulting from an
insurance claim), the reimbursement should be recognised as a separate
asset only if it is virtually certain to be received. In the profit
and loss account, the expense relating to the provision may be
presented net of the recovery. Gains from the expected disposal of
assets should be excluded from the measurement of a provision.
Provisions should be reviewed at each balance sheet date and adjusted
to reflect the current best estimate. They should be used only in
respect of expenditures for which the provision was originally
recognised.


6233 FRSSE 11.6
For each class of provision the following must be disclosed:

-  the amount of the provision at the beginning and the end of the
financial year;

-  amounts transferred to or from the provision during the year;

-  the source and application of the amounts transferred; and

-  particulars of each material provision included under "other
provisions" in the company's balance sheet in any case where the
amount of that provision is material.




The above disclosures are not required where the movement consists of
the application of a provision for the purpose for which it was
established.


6235 FRSSE 11.7 - 11.  11
Contingent liabilities and contingent assets should not be recognised
in the accounts but the following should (unless, in the case of
contingent liabilities, where their existence is remote) be disclosed
in the notes:

-  a brief description of the nature of the contingent item;

-  where practicable, an estimate of its financial effect;

-  its legal nature.


6236Where any valuable security has been provided by the company in
connection with a contingent liability, details must be disclosed.
Where practicable, the aggregate amount, or estimated amount, of
contracts for capital expenditure not provided for must be disclosed.
Details of any other financial commitments not provided for, which are
relevant to assessing the company's state of affairs, must also be
disclosed.
Particulars must be given of any charge on the assets of the company
to secure the liabilities of any other person, including where
practicable, the amount secured."

On Jan 16, 7:11 pm, PeterSaxton  wrote:
> On 16 Jan, 14:46, Andy Lord  wrote:
>
>
>
>
>
> > Is their any requirement for a limited company to make allowances in
> > its accounts for sums which *may* become due under the the Late
> > Payment of Commercial Debts Act?
>
> > Company A has provided services to Company B on a regular basis for
> > several years and has always emphasised its right to claim late
> > payment charges, although it has never actually claimed them. They
> > have six years from the creation of the debt (ie from when each
> > invoice became overdue) to claim the charges. If they claim these
> > charges now the figure would be something over £16k.
>
> > It is not unreasonable to assume that Company B has many other
> > suppliers in the same position - in fact I'm aware of two others and I
> > believe there are many more.
>
> > Company B's latest accounts show Shareholders' Funds of c£21k. If
> > claims for all outstanding late payment charges were to be made I
> > would envisage a liability of at least £35k and possibly over £200k.> > Should Company B be recording their potential liability every time
> > they pay a supplier's invoice and making allowances for potential
> > claims on their balance sheet?
>
> > --
>
> > Andy
>
> I would say not.
>
> See FL Memo extract:

Thanks, I was aware of that.

The point is that the debt (the late payment charges) exists whether
it's been claimed or not - the debt is automatically created by the
default of the customer.  The extent of *potential* liability is
relatively easily quantifiable by Company B, so surely some mention of
this should be made in the accounts?

--

Andy

On 17 Jan, 11:56, Andy Lord  wrote:
> On Jan 16, 7:11 pm, PeterSaxton  wrote:
>
>
>
>
>
> > On 16 Jan, 14:46, Andy Lord  wrote:
>
> > > Is their any requirement for a limited company to make allowances in
> > > its accounts for sums which *may* become due under the the Late
> > > Payment of Commercial Debts Act?
>
> > > Company A has provided services to Company B on a regular basis for
> > > several years and has always emphasised its right to claim late
> > > payment charges, although it has never actually claimed them. They
> > > have six years from the creation of the debt (ie from when each
> > > invoice became overdue) to claim the charges. If they claim these
> > > charges now the figure would be something over £16k.
>
> > > It is not unreasonable to assume that Company B has many other
> > > suppliers in the same position - in fact I'm aware of two others and I> > > believe there are many more.
>
> > > Company B's latest accounts show Shareholders' Funds of c£21k. If
> > > claims for all outstanding late payment charges were to be made I
> > > would envisage a liability of at least £35k and possibly over £200k.
>
> > > Should Company B be recording their potential liability every time
> > > they pay a supplier's invoice and making allowances for potential
> > > claims on their balance sheet?
>
> > > --
>
> > > Andy
>
> > I would say not.
>
> > See FL Memo extract:
>
> Thanks, I was aware of that.
>
> The point is that the debt (the late payment charges) exists whether
> it's been claimed or not - the debt is automatically created by the
> default of the customer.  The extent of *potential* liability is
> relatively easily quantifiable by Company B, so surely some mention of
> this should be made in the accounts?
>
> --
>
> Andy

The debt doesn't exist in the sense that it is unlikely to have to be
paid unless the supplier claims it and that doesn't seem to be likely
to happen.