Early planning can save headaches over non-cash transactions


27-05-2003

With an increasing number of technology companies engaging in non-cash transactions, David Halstead from Deloitte & Touche in Cambridge has some advice for avoiding nasty accounting surprises.





Accounting works on the 'no such thing as a free lunch' principle, with the presumption that if a company carries out a transaction with a third party, there is an exchange of value.



Usually, one side of the transaction consists of a cash payment, which tends to make the accounting simple, as the value is fixed. But when parties to a transaction make non-cash payments, such as issuing shares in a company in return for services or swapping licences, problems start to arise. The cash constraints of technology companies mean that they regularly engage in non-cash transactions.



From a conceptual point of view, accounting for non-cash transactions can be simple - transactions should be accounted for at 'fair value'. So, where no cash is involved, other factors need to be considered to establish the value of the transaction. This is where it becomes less clear-cut.



There is little detailed guidance in the accounting rules about how to deal with non-cash transactions, but my advice is this - make sure that your auditor knows about any such transactions that have taken place, or better still, before they happen. I know of more than one company that has been surprised by the consequences of a seemingly innocuous transaction after the event. The most common problems that arise are an inability to record revenue or the creation of unexpectedly large costs in the profit and loss account.



To take two examples:



Example A

A company licences its product. One of its customers has a technology that the company would like access to. So, the companies set up cross-licences, with each licence valued at 500,000. Even if the companies pay each other 500,000 there are still questions to be answered. The main question is whether each company can recognise 500,000 worth of sales. The answer will depend on a number of circumstances, and could be yes or no.



Example B

Another example would be where a company issues shares to a third party in return for the third party granting a technology licence. In general, the transaction would be recorded in the company's books at the value of either the shares or the licence. But in a private company, neither of these values might be easy to determine. So, judgement will be required to assess how to correctly account for the transaction.



In summary, while non-cash transactions can be a headache, early planning will reduce the chances of accounting consequences getting in the way of commercial progress.





David Halstead is a Partner at Deloitte & Touche in Cambridge. Contact him by email dhalstead@deloitte.co.uk



27 May 2003



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