I am currently contracting as a Senior Assistant Accountant to a New Zealand IT company (owned by an Australian company), which provides IT support services to New Zealand customers.
The CFO has advised that the first 2 months of a new employee's tenure is spent in training him/her for the support service role ie his/her time is not billable against a customer.
Then after the 2 months period is up, the new employee will be able to provide support services and therefore his/ her time becomes billable to the customer.
Because of this situation, the CFO has asked me to code the new employees' wages costs for the first 2 months, to a new GL Current Asset
account, called 'Prepayments- WIP Labour'.
Then after the first month, I am to start amortising the amounts in 'Prepayments- WIP Labour' asset account over a period of 12 months, to the Direct Wages expense account in COGS. Note, the period of 12 months is the usual term of the support service agreement with a customer.
The CFO has explained that the aim of this procedure is to match the monthly wages costs more accurately against the monthly revenue amounts. Note, this will appear in the monthly management reports, and also in the Statutory Financial Reports.
My question is this - Is this proposed procedure an acceptable accounting
practise (ie is it covered by GAAP or IFRS), or is this not an acceptable accounting prtactise, in which case I will advise that fact to the CFO, and we will not be able to perform these procedures.
My concerns are that the profit may be overstated, and the assets may also be overstated; and if these financial reports are relied upon by an external party, then this could present an inaccurate picture?
Also, if the company were to shut down today, can the 'Prepayments WIP-Labour' asset account really be considered an asset?
Thank you for your help, I look forward to hearing from you.
Kind Regards, *****