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HMRC internal manual

Animation Production Company Manual

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HM Revenue & Customs
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Taxation: profit/loss calculation - income - timing

S1216BA, S1216BD Corporation Tax Act 2009 (CTA 2009)

Where the animation trade of a Television Production Company (TPC) is within the rules in Part 15A CTA 2009 (APC20010), income is recognised and expenditure is incurred in line with current accounting principles. This is the case even where the programme expenditure would not be recognised on the profit and loss account because the company is creating a capital asset for exploitation (APC20230).

For more details on this matching of income to expenditure see APC20250.

This treatment results in profits being recognised as production progresses and not just at completion, unless there are specific contingencies outside the control of the person doing the work.

The underlying principles of revenue and profit recognition are embodied in section 23 of FRS102.  Other accounting standards dealing with revenue and profit recognition are Application Note G to FRS5, UITF40, IAS18, SSAP9 and IAS11, none of which contain principles that are substantially different to section 23 of FRS102.  

This reaffirms the principles contained in section 23 of FRS102.  Other accounting standards dealing with revenue and profit recognition are Application Note G to FRS5, UITF40, IAS18, SSAP9 and IAS11, none of which contain principles that are substantially different to section 23 of FRS102.  9) ‘Stocks and Long-term Contracts’. This was further clarified by Urgent Issues Task Force Abstract 40 (UITF40) ‘Revenue Recognition and Service Contracts’, the conclusion of which is broadly comparable to the requirements of International Accounting Standard No 18 (IAS18) ‘Revenue’.

IAS18 itself cross refers to IAS 11 ‘Construction Contracts’ and requires the rendering of services to be recognised by reference to the stage of completion of the transaction at the balance sheet date.

For accounting periods beginning on or after 1 January 2015, UK businesses will follow Financial Reporting Standard 102 (FRS102) - ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’. This will effectively replace and consolidate SSAP9.

The method of calculating profits or losses will then follow the model provided by Sections 13 and 23 of FRS102 - ‘Inventories’ and ‘Revenue’, respectively. There should be little change for practical purposes as to when revenue is first recognised.

The amount of income to be recognised at the end of an accounting period is given by a formula (APC20250). This measures the state of completion of the programme by reference to the production expenditure to date compared to the estimated total production expenditure on the programme. We would expect future income to be discounted before being brought into this formula.

When the programme is complete there will generally be no further expected expenditure on its production. If the rights in the programme are sold outright there will also be no further expenditure on its exploitation. All the known estimated income will have been recognised and any further income should be recognised as it is earned.

If the programme is retained and exploited there will be further expenditure on exploitation.