Questions and Answers (May 25, 2010)
Q: For the webcast, we only received IRS form 1120S (Subchapter S Corporation) and not the IRS form 1065 (Partnership) in the downloaded material.
A: Since the company we feature in the webcast (Information Access, Inc.) is a Subchapter S Corporation, that is the only material we included for participants to download for the Business Income Tax Returns webcast.
We did, however, include a few Screen Captures in the PowerPoint slides of the IRS 1065 (Partnership) forms to show the difference between them and the IRS form 1120S for Information Access, Inc.. You will find copies of all IRS forms on their website.
Q: On Schedule M-2 Line 7 of the 1120S, there are distributions reported of $37,796. Why does this figure differ from the K-1's and Schedule K?
A: The amount recorded at Line 20 on Keys’ Schedule K-1 is Keys’ pro-rata share of total distributions from Information Access, Inc. in 2001. Of the $709,446 total, Keys’ 82% share translated to $581,746 – the amount recorded at Line 20.
Schedule M-2 on Form 1120S captures selected amounts for the whole company. The amount listed at Line 7 in Schedule M-2 reflects the amount of 2001 distributions that came from 2001 operations. In other words, of $709,446 in total distributions, only $37,796 is attributed to 2001 operations.
Q: Should billings and costs in excess be included in asset based accounting? Asset Based deals assume basically "cash basis" accounting. Assuming the doors close today, where do you stand. Thus, billings in excess would not be collected and costs in excess would not be billed if the company were to go out of business.
A. The percentage of completion method of accounting used in the construction industry is handled differently with GAAP financial statements than it is with income tax returns using IRS tax regulations. It is intended to show where a company stands financially on construction projects before they are completed.
For GAAP prepared financial statements, billings in excess of costs are located on the balance sheet as a liability and costs in excess of billings are also on the balance sheet as an asset. However, per IRS tax regulations, billings in excess of costs are considered to be income while costs in excess of billings can be deducted as expenses.
This methodology assumes a “going concern” situation and your question seems to address a potential work-out scenario. I would agree that the value of billings in excess of costs and costs in excess of billings might be questioned in the liquidation of a company, but so would the value of many other assets on the balance sheet in a work out situation.
Q. One question that comes up a lot in loan committee in looking at debt service analysis, especially for contractors, is how to analyze income from tax returns on accrual basis vs. income from financials on % of completion method.
In some cases, there is a big difference in the two. For example, I have a customer that has $1.4mm in this category as current asset and $91m as current liability. What does this tell us? Which should be used in determining actual income for analysis purposes?
A: Billings in excess and costs in excess can apply to several jobs or projects underway at the same time. If a contactor had only one job throughout the year, it could show either costs in excess of billings or billings in excess of cost but not both for a single job.
In your example, your customer had, collectively, billed clients $91,000 in excess of the costs and profits it had incurred on those jobs or projects. At the same time, and with respect to different jobs or projects, your customer reported costs and profits as $1.4 million less than the invoices it had sent to clients for the work it had completed.
As all jobs come to completion, billings in excess of costs and profits will be eliminated and costs and profits in excess of billings will be eliminated. But while jobs or projects are in process, it is very common to see both billings in excess of costs and profits and costs and profits in excess of billings. From a contractor’s viewpoint, he or she would vastly prefer to bill in excess of cost and profits, since, if the client pays the invoice, it provides cash for the contractor to pay for the project as it unfolds.
In addition, as we discussed in the webcast, for GAAP prepared financial statements, billings in excess of costs are located on the balance sheet as a liability and costs in excess of billings are also on the balance sheet as an asset. However, per IRS tax regulations, billings in excess of costs are considered to be income while costs in excess of billings can be deducted as expenses against that income.
Q: Can you help us better understand the current asset "costs and estimated earnings in excess of billings" and current liability "billings in excess of costs and estimated earnings".
Billings in Excess of Cost and Profits
The amount of invoice to a client that exceeds the actual work performed under a specific contract using the percentage of completion method of accounting. Given the terms and conditions that apply to a project, a contractor may invoice the client in excess of the amount of work completed at the time of the invoice. The company increases accounts receivable by the amount of the invoice. It increases revenue (cost and profits) by the amount of work completed at the time of the invoice. If the invoice amount exceeds the value of work performed at that point, the difference is recorded as billings in excess of cost and profit, reflecting an obligation to deliver – or complete – a specific amount of product in the future.
The accounting entries to record a $25,000 invoice issued by a contractor for $20,000 of work completed are illustrated below.
Billings in excess of cost and profit is similar in concept to customer deposits and deferred revenue or deferred income.
Cost and Profits in Excess of Billings
The amount of invoices to a client that is less than the actual work performed under a specific contract using the percentage of completion method of accounting.
If a contractor has invoiced a client for less than the value of work performed at the end of a reporting period in which the contractor recognizes revenue, the difference between the invoice amounts and the value of work performed, i.e., the revenue for the period, represents cost and profits in excess of billings.
The accounting entries to recognize revenue of $25,000 and invoices of $20,000 for worked performed are illustrated below.
Cost and profits in excess of billings is also referred to as unbilled receivables or unbilled work in progress.
Q: For the webcast, we only received IRS form 1120S (Subchapter S Corporation) and not the IRS form 1065 (Partnership) in the downloaded material.
A: Since the company we feature in the webcast (Information Access, Inc.) is a Subchapter S Corporation, that is the only material we included for participants to download for the Business Income Tax Returns webcast.
We did, however, include a few Screen Captures in the PowerPoint slides of the IRS 1065 (Partnership) forms to show the difference between them and the IRS form 1120S for Information Access, Inc.. You will find copies of all IRS forms on their website.
Q: On Schedule M-2 Line 7 of the 1120S, there are distributions reported of $37,796. Why does this figure differ from the K-1's and Schedule K?
A: The amount recorded at Line 20 on Keys’ Schedule K-1 is Keys’ pro-rata share of total distributions from Information Access, Inc. in 2001. Of the $709,446 total, Keys’ 82% share translated to $581,746 – the amount recorded at Line 20.
Schedule M-2 on Form 1120S captures selected amounts for the whole company. The amount listed at Line 7 in Schedule M-2 reflects the amount of 2001 distributions that came from 2001 operations. In other words, of $709,446 in total distributions, only $37,796 is attributed to 2001 operations.
Q: Should billings and costs in excess be included in asset based accounting? Asset Based deals assume basically "cash basis" accounting. Assuming the doors close today, where do you stand. Thus, billings in excess would not be collected and costs in excess would not be billed if the company were to go out of business.
A. The percentage of completion method of accounting used in the construction industry is handled differently with GAAP financial statements than it is with income tax returns using IRS tax regulations. It is intended to show where a company stands financially on construction projects before they are completed.
For GAAP prepared financial statements, billings in excess of costs are located on the balance sheet as a liability and costs in excess of billings are also on the balance sheet as an asset. However, per IRS tax regulations, billings in excess of costs are considered to be income while costs in excess of billings can be deducted as expenses.
This methodology assumes a “going concern” situation and your question seems to address a potential work-out scenario. I would agree that the value of billings in excess of costs and costs in excess of billings might be questioned in the liquidation of a company, but so would the value of many other assets on the balance sheet in a work out situation.
Q. One question that comes up a lot in loan committee in looking at debt service analysis, especially for contractors, is how to analyze income from tax returns on accrual basis vs. income from financials on % of completion method.
In some cases, there is a big difference in the two. For example, I have a customer that has $1.4mm in this category as current asset and $91m as current liability. What does this tell us? Which should be used in determining actual income for analysis purposes?
A: Billings in excess and costs in excess can apply to several jobs or projects underway at the same time. If a contactor had only one job throughout the year, it could show either costs in excess of billings or billings in excess of cost but not both for a single job.
In your example, your customer had, collectively, billed clients $91,000 in excess of the costs and profits it had incurred on those jobs or projects. At the same time, and with respect to different jobs or projects, your customer reported costs and profits as $1.4 million less than the invoices it had sent to clients for the work it had completed.
As all jobs come to completion, billings in excess of costs and profits will be eliminated and costs and profits in excess of billings will be eliminated. But while jobs or projects are in process, it is very common to see both billings in excess of costs and profits and costs and profits in excess of billings. From a contractor’s viewpoint, he or she would vastly prefer to bill in excess of cost and profits, since, if the client pays the invoice, it provides cash for the contractor to pay for the project as it unfolds.
In addition, as we discussed in the webcast, for GAAP prepared financial statements, billings in excess of costs are located on the balance sheet as a liability and costs in excess of billings are also on the balance sheet as an asset. However, per IRS tax regulations, billings in excess of costs are considered to be income while costs in excess of billings can be deducted as expenses against that income.
Q: Can you help us better understand the current asset "costs and estimated earnings in excess of billings" and current liability "billings in excess of costs and estimated earnings".
Billings in Excess of Cost and Profits
The amount of invoice to a client that exceeds the actual work performed under a specific contract using the percentage of completion method of accounting. Given the terms and conditions that apply to a project, a contractor may invoice the client in excess of the amount of work completed at the time of the invoice. The company increases accounts receivable by the amount of the invoice. It increases revenue (cost and profits) by the amount of work completed at the time of the invoice. If the invoice amount exceeds the value of work performed at that point, the difference is recorded as billings in excess of cost and profit, reflecting an obligation to deliver – or complete – a specific amount of product in the future.
The accounting entries to record a $25,000 invoice issued by a contractor for $20,000 of work completed are illustrated below.
Debit: Accounts Receivable $25,000
Credit: Revenue (cost and profits) $20,000
Credit: Billings in Excess of Cost and Profits $5,000
Cost and Profits in Excess of Billings
The amount of invoices to a client that is less than the actual work performed under a specific contract using the percentage of completion method of accounting.
If a contractor has invoiced a client for less than the value of work performed at the end of a reporting period in which the contractor recognizes revenue, the difference between the invoice amounts and the value of work performed, i.e., the revenue for the period, represents cost and profits in excess of billings.
The accounting entries to recognize revenue of $25,000 and invoices of $20,000 for worked performed are illustrated below.
Debit: Accounts Receivable $20,000
Debit: Cost and Profits in Excess of Billings $5,000
Credit: Revenue $25,000