WIP and CFA
I'll start this by saying I'm familiar with UITF40 guidance whereby CFA WIP is effectively included at nil valuation on the basis that until the case is won or lost, the potential value of the WIP is nil. Our (solicitor) clients prepare accounts in accordance with UITF40 and exclude such WIP. However, they have an issue with outgoing (and to a similar extent incoming) partners whereby they want a partner who retires or leaves, to receive some credit for CFA WIP at his leaving date despite this not being included in the accounts at that date.
There appear to be 3 ways around this issue:-
1. Include CFA WIP at the leaving date in the accounts as if the case will be won. This would appear to be against general accounting principles and would accelerate tax liabilities for all partners.
2. Make some form of adjustment between capital accounts to increase the outgoing partner's capital account by his share of the value (?) of CFA WIP at his retirement date and reduce the continuing partners' capital accounts. If so, how would this be taxed for both the retiring partner and the remaining partners?
3. When the outcome of the case is known, making a payment to the retired partner for his share of the value of CFA WIP that existed at his leaving date - administratively complex but more accurate. Presumably such receipts would be taxed as post cessation income receipts in the hands of the retired partner but I cannot see how the continuing partners would get any relief for the payments they make to him with the result that the income would be taxed twice - on the partnership when the fees are received and also on the retired partner in respect of his agreed percentage.
I'm principally concerned with the tax aspects of this issue as I think I'm quite clear on the accounting treatment.
Any thoughts from the community?
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