Practice Tip - WIP is the big issue for the next year

Richard Murphy considers the impact of the recent UITF Abstract 40 dealing with revenue recognition.


The news that the UITF has finally decided that WIP on periodic contracts has to be recognised as income to the stage of service completion at the year end date will have a major impact on all firms of accountants and many of their clients.

UITF declarations do, of course, have the impact of being tax law. And what this one says is, in lay terms, quite simple.

Continued...

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Comments

para 19

martinfoley07 | | Permalink

Jon
I would bet that most if not all those contributing have read para 19 and all the rest!! Whether the UITF stopped just short of irrefutably prescriptive wording as a matter of deliberate policy, or as a possible fudge, I can't say. But I am quite content to take the precise words used in the document to argue it does not FORCE the taking of pro-rate profits on all short term fixed price contracts for services, precisely because I believe in the substance of the contract, and not some "mere" technical trickery. I believe that if you wish to, you most certainly CAN take pro-rate profits under the terms of the UITF pronouncement (see below). But I don't consider in the sort of cases we are discussing it is as a matter of accounting best sense/practice to do so (forget tax deferment - one problem is that a high proportion of professional firms have used accounting methods to defer tax payment which I personally think are of very dubious intellectual provenance). Dear old Prudence was nuked a long time ago (with profoundly mixed blessings) but the implied "matching" being argued in this instance is not comfortable at all - it does not go with the substance of the transaction, IMHO, hence my position in interpretation. So I am relaxed about using the words in their English sense. If UITF wish to argue that performance MUST be in the sellers control merely because the contract was entered into in good faith and expectation it would happen, I disagree, and am very comfortable presenting the case for disagreement.

Has anybody looked at para 19 of UTIF 40

MBK | | Permalink

where it says "Where the substance of a contract is that a right to consideration does not arise until the occurrence of a critical event, revenue is not recognised until that event occurs. This only applies where the right to consideration is conditional or contingent on a specified future event or outcome, the occurrence of which is outside the control of the seller"

What a number of people have said is that they could not, in reality, charge for a partly completed set of accounts. A court (except in odd situations such as client disengagement) would tell you to go away if you tried - unless the engagement letter explicitly covered it.

Which gives the key - CLIENT ACCEPTANCE. If your letter of engagement says words along the lines of "we cannot charge you for your accounts until you have accepted them" then UITF 40 explicitly says you CAN NOT recognise the revenue until you have acceptance because you have a "future specified event or outcome" which is outside your control.

Many (myself included) would say that this position is already an implied term of the contractual relationship with our clients. But, if you want belt and braces, amend the engagement letter. There are obvious commercial issues to be dealt with (such as delay in acceptance or failure to provide info on time) but it should not be beyond the wit of man to deal with these. Perhaps the ICAEW might even help us! If that is done, we should be able to continue to account for the vast majority of WIP as we always have done.

One would obviously need to apply this process to each discrete "service packet" that we offer so it is likely that there will be some advancing of revenue recognition because some small service packets which otherwise don't get billed until some time after they are accepted by the client will have to be taken in as recognised revenue. But I think everyone agrees that this is just a flaw in the "historic" methodology that has previously been tolerated for the sake of simplicity.

I don't buy the "going concern" or "subsequent events" argument - the WIP position is a snapshot at the accounting date and what happens after that is not relevant for these purposes.

Am I missing something?

brian.mercer's picture

As a matter of principle...

brian.mercer | | Permalink

"as a matter of principle there is no difference between the accounting required for long-term contracts and other contracts for services"
I beg to submit that the above extract from Abstract 40 is wrong - yes - in principle!
It all goes wrong from this point on. Contracts for services are many and extremely varied; in fact a contract for services is very different from a Contract for the Construction of a Tangible Fixed Asset.
Please will someone with a bit of clout stand up and tell the UITF that they are wrong and that it should be "as a matter of Practice..."

But we need consistency

MBK | | Permalink

Martin
I accept all you say - but I don't think it applies just to fixed price arrangements. It seems to me that if you have an appropriately worded engagement letter you can legitimately defer revenue which is ultimately billed on the basis of chargeable hours entirely within the ambit of UITF 40 - just so long as you have not reached the "trigger" that you will set in the engagement letter.

The problem you and I seem to have though is that the ICAEW (whose opinion of course carries a lot of weight)seem to have just rolled over and said "sorry guys, you may be our members, but we can't help you to properly not pay tax on income which everybody knows intuitively should not be recognised" - see the posting imediately before yours for a perfect example. I have seen no evidence that the ICAEW have been over UITF 40 in the way that this forum is doing. They should have done this if they were properly acting in our interests. Unless or until they do, you and I may well find that the accounts of our businesses are in a small minority - which would give us a very hard time defending our position in front of HMRC (or whatever they are called this week).

What is required is for the ICAEW to issue detailed (and by that I mean drilling down to the micro level of looking at all the various service packets we offer) technical guidance on the accounting (not tax) issues. This can only happen after proper consultation with its members who, I suspect, know rather more about the detail than they do at the moment!

whose responsibilty?

martinfoley07 | | Permalink

2 separate strands here - (i) how come this has happened (ii) what do we do now it has?

I am quite sure the UITF internally debated all (and more) of the issues as are debated in these postings. As per earlier postings, I do not concur with the (possible!!)thrust of part of their (possible!!) conclusions, so am quite happy to take their wording and interpret in a way which
(i) is not internally incompatible with UITF wording
(ii) makes accounting sense to me,
and defend that view.

However, until UITF eventually pronounced, by definiton no-one (except insiders!) knew what they would say.

Presumably ICAEW (and other professioanl bodies) knew what was coming, and argued their view and (if they disagreed) lost. So short of refusing to recognise ASB as the accounting standards setter (and no, that is not a sensible strategem IMHO!!), I'm not sure what more ICAEW could do before the pronouncement.

Post announcement, they seem to be doing various things, but I don't know if we are going to get (or want?) even more micro-definitive stuff than we have already?

What they can do on the big stage to re-define the pronouncement I don't know - perhaps others can comment (without impractical nuclear options, please!!)

As for clients, do we not simply tell them as it is? The world is not yet black and white - when (not if) it becomes so, there will by definition be a need only for computers and box ticking as regards most accounting, taxation and other professional matters (including law, medicine etc). This has clearly been coming for 25 years, but Techies are always wildly out as to its timing. As professionals I don't think it should be beyond our qualities, judgement and communication skills to deal with this?

I know (and understand) why tax folk in particular want black and white, but be aware it means logically and inexorably they won't have a job of any value!!!

Ironically (since I consider some of the (possible!!) conclusions to be misplaced), it seems from ICAEW let alone other comments, that it is the desire for partially over-egged (IMHO)tax deferral in professional firms that is causing much of the real grief.

I remain more concerned we are accelerating accounting profits too far in advance of substance. I don't see how this helps business stakeholders (whether owners, shareholders, employees, customers, suppliers et al). It is the unceasing attempts to accelerate profits that have led to business scandals, not excessive prudence (or rather, as Prudence no longer exists, inadequate matching accounting!!).

As always, put in writing advice to clients of such potential importance and difficulty. I don't believe that is back-side covering, it is simply pointing out critical facts.

What if the client cancels?

AnonymousUser | | Permalink

All the argument from those who take Martin's view, below, seems to be based on the scenario that the client would not be prepared to pay for incomplete accounts. What if it was the other way round? You had more or less completed the accounts, were just doing a final check, when out of the blue the client said 'someone's offered to do them for me cheaper, I don't want them any more.' Would you say 'OK, that's fine' and write off the time? Or would you bill it? If(!) the latter then you have done work for consideration - a promise of future payment for the work that has been done so far.
The Abstract makes it as clear as it can that this is the position, in my view, although Robert Maas gives the argument for the contrary as good a run for its money as you'll get, and (if Andrew will allow me a little plug, since it is useful to his readers too), because it was our Comment article this week it is free for all to read here.

Consistency

Mike Wood | | Permalink

I completely agree with Jon Gammon's last posting. In the absence of detailed, quality guidance from the accounting bodies, this debate has been the first opportunity to consider, in the detail required, the different interpretations being put on UITF40.

But what about our clients as well? How can we advise lawyers, surveyors, architects, etc, even businesses like cleaning contractors, about the implications of all of this when our own professional bodies are unable or unwilling to offer to their own members the detailed 'micro-guidance' to which Jon refers?

rescision of contract

martinfoley07 | | Permalink

Mike
The point you raise relates to the client rescinding a contract. It has nothing to do with fulfillment of the contract. On the contrary, the contract cannot be fulfilled. So I agree you would go for compensation!! But in your example, the client has breached the contract, that is what you are pursuing him for. I don't agree that proves the "income recognition before contract fulfilled" point at all.

I think I should emphasise, for the avoidance of doubt, that if the contract is a time and materials contract (ie performance is delivery of accounts, but you will pay me for whatever hours I clock at £x per hour, determinable at point of delivery of accounts) then the income derived is clearly to be recognised at the time it is clocked (subject to any judgemental provision if accountant has serious concern as to final payment or completion of the contract). In my view, this would always have been the appropriate accounting treatment anyway, even if firms chose to not do so.

But I emphasise I am not trying to use technical trickery to differentiate or split hairs - it is indeed the substance of the contract (as well as mere form) which is to be followed. If the substance is "you'll pay me £x per hour", so be it, and your accounts should reflect this.
In my view/experience, a genuine "fixed price" contract for such a short term matter as producing annual accounts does not dictate the same treatment at all, and (as said) I do not read the new announcements to say it does.

disagree....

martinfoley07 | | Permalink

... Richard. However, there seems to be some minor confusion (as often happens when various strands and postings run concurrently), as to what we are disgreeing on!! For the avoidance of doubt, I have never argued that the pronouncements do not cover accountants (or lawywers or anyone else!!). Others have in their postings, but it is not a view I take.

Where we do disagree is the interpretation - I am personally quite clear and comfortable that if a contract is for (let's say) the delivery of a Companies Act compliant set of annual accounts, this indeed is for a very specific discrete event, the execution and timing of which is readily identifiable. I do NOT read the terms of the pronouncements to say that a realisable asset has been created before that event (unless of course the contract DOES provide for part performance). You do. To argue that the client has always stumped up in the past does not overturn this. Nor does the fact that the accountant intends to complete his side of the contract create a partially realisable asset.
Let's go on - if the terms of the contract are that the client pays say half (of a non-refundable) fee on preparation of draft accounts, then that part of the contract income is accounted for on preparation of drafts.
If the terms of the contract are that the client pays (non-refundable) payments on account of work undertaken, again that is different and the income should be accrued - it has contractually arisen.
As I say, to be honest I do not read the pronouncements to be anything other than "sensible", but I would change my mind if your interpretation is correct and mine wrong!!

richard.murphy's picture

I have to disagree

richard.murphy | | Permalink

Martin

I have to disagree

The is not a form argument, it's a substance one. The substance is that this is a contract entered into with the expectation of completion. So that view prevails.

If it did not then I acnnot see how there could ever be long term WIP.

But it's been agreed there is.

I think you'd be on a sticky wicket in front of the Commissioners on your case.......

Richard

form/substance, commissioners/ASB

martinfoley07 | | Permalink

Richard,
Surely every contract entered into is intended to be completed (unless bad faith involved) so I think that is simply not a relevant issue.

I think it is the ASB (or its successors, predecessors etc etc) who would be first port of "appeal" rather then the "Commissioners"!!

I can't think of anything more clear cut than the statement about a specific event occuring and being fundamental to the contract. It is indeed the substance of the contract, not merely its form. You seem to interpret this as meaning a success style arrangement. I interpret it on the words used.

At least it is clear where we disagree, and I'd be very comfortable arguing my interpretation.

UITF40 and the new FRSSE

Mike Wood | | Permalink

Reading Richard's and Martin's comments, and also the article by Robert Maas in last week's Taxation, it is clear that interpretations of the revenue recognition principles in UITF40 and the new FRSSE vary just as much as the interpretations issued after Application Note G to FRS5 was originally published.

As a profession, we need to be able to explain the principles to clients who could be affected and, given the differences of opinion in our profession, this is quite a challenge!

Richard - referring to the text of the new FRSSE, which in this area follows UITF40 closely, para 4.1 says that 'a seller recognises revenue under an exchange transaction with a customer, when, and to the extent that, it obtains the right to consideration in exchange for its performance.'

When.....not before.

In other words, the right to consideration must have been obtained before revenue can be recognised. If no such right has been obtained at the balance sheet date, no revenue should be recognised on the assignment in the accounts.

'Right to consideration' is defined as 'a seller's right to the amount received or receivable in exchange for its performance'. 'Performance' is defined as 'the fulfilment of the seller's contractual obligations to a customer through the supply of goods and services.'

Para 4.3 says that 'a seller may obtain a right to consideration when some, but not all, of its contractual obligations have been fulfilled. Where a seller has partially peformed its contractual obligations, it recognises revenue to the extent that it has obtained the right to consideration through its performance.'

So, if a seller has not obtained the right to consideration through its performance by the balance sheet date, no revenue should be recognised on the contract. The assessment of whether a right to consideration has been obtained must be made with reference to how much of the seller's contractual obligations have been performed at the balance sheet date.

For many assignments carried out by accountants and lawyers (for example) the substance of the contract is that the right to consideration is not obtained until the assignment is complete. (Failure to complete is likely to be a breach of contract by the seller - its contractual obligations have not been fulfilled and there is no question of recognising revenue.)

I would welcome other views on this.

richard.murphy's picture

Why UITF 40 does apply to accountant's work (2)

richard.murphy | | Permalink

5. UITF 40 says “Where the outcome of a contract can be assessed with reasonable certainty, the prudently calculated attributable profit should be recognised as the difference between turnover and the related costs. The excess of turnover over payments on account is reported as 'amounts recoverable on contracts' within debtors.” That seems clear, but Martin’s argument seems to be that if the work is not complete then revenue need not be recognised because the client has no obligation to accept it at the year end date. That is obviously wrong. That is only true when the following statement in UITF 40 applies “Where the substance of a contract is that a right to consideration does not arise until the occurrence of a critical event, revenue is not recognised until that event occurs.” This would be true if the fee was, for example, a success based fee dependent upon sale of the client. Then no income need be recognised until the sale has occurred (and success based fees are frowned upon in accountancy by and large, so they will be rare).

6. The reason why Martin is wrong is simple. He has forgotten the going concern concept. We assume the business will survive. We assume it will honour its obligations and complete its contracts, and except when faced with evidence to the contrary we assume clients will do likewise. We assume therefore that assets are valued on the going concern basis in the balance sheet unless there is evidence to the contrary. Of course, if there is specific evidence (by which I mean, third party evidence) of a client’s refusal to accept the work the firm has done and to pay for it then provision against the figure due to be included in debt under UITF 40 is obviously allowed. But that’s because that is an adjusting post balance sheet event, and not because UITF 40 is wrong.

It therefore follows that if going concern rules apply, and they must under existing arrangements, then Martin is wrong to think that somehow accountants can get out of this rule because the service is not complete at the year end date and might, therefore, conceivably
(even if not actually) not be. As such there is no let out just because the work is not finished or delivered, unless it can be proved in practice that it was not delivered or the firm was not paid as a matter of fact.

So, I’m afraid Martin that UITF 40 applies.

Whether it should is another matter altogether.

richard.murphy's picture

Why UITF 40 does apply to accountant's work (1)

richard.murphy | | Permalink

Martin Foley and others raise issues about whether UITF 40 requires an accountant to recognise their income as being, in effect, earned under long term contracts and therefore subject to the UITF ruling.

I think there are good reasons why Martin’s argument that UITF 40 does not apply is wrong, and since he has asked for reasons to be given let me explain why:

1. UITF 40 says it is intended to apply to the services of accountants. We should therefore assume that it does.
2. As has been shown by me (and others) below, you either prepare accounts in the UK under the FRSSE or GAAP. UITF 40 is now GAAP. The FRSSE reflects the same basic opinion. The Revenue only accept accounts prepared under GAAP or the FRSSE. Anyone who wishes to argue that the UITF is not binding for tax purposes is, I am afraid, taking a now long defunct argument forward. This point has been conceded.
3. UITF 40 says “Contracts for services should not be accounted for as long-term contracts unless they involve the provision of a single service, or a number of services that constitute a single project.” It is said that “a contract to provide repetitive services (such as general professional advice, accounting support, help desk support, maintenance or cleaning) on an ongoing basis should not be accounted for as a long-term contract”. But, at let me explicit about the point, the Revenue have required timely billing within the accounting period for services completed within it for many years now. This point was basically made clear at the time of transition to the current year basis of taxation when failing to bill on time was sufficient cause for penalties to arise. In other words these forms of non discrete, time delineated, on going contracts should be billed periodically and within the accounting period to which they relate in any event, and so WIP should not arise on them.
4. In that case all other contracts accountants supply are for single projects. And this will always be true of reports, accounts preparation, business plans, audits, tax returns and so on. That’s probably 90% or more of income for most firms. UITF 40 applies to these.

Andrew Goodall's picture

FRSSE

Andrew Goodall | | Permalink

Travis, this appears to be covered at question 19 of the ICAEW's Frequently Asked Questions published in April.

"Reporting entities applying the Financial Reporting Standard for Smaller Entities currently applicable are exempt from the Abstract. However, the 'Status of the FRSSE' makes it clear that smaller entities should have regard to UITF Abstracts 'as a means of establishing best practice'."

See also Mark Lee's comment below.

Andrew Goodall
Editor, TaxZone

richard.murphy's picture

In my opinion the UITF will be persuasive

richard.murphy | | Permalink

I know the UITF does not apply to the FRSSE.

But then - how many accountants apply the FRSSE to unincorporated accounts?

Do you say you do?

Would you know how to?

And if you don't, then the UITF does apply because that's the default position.

And since the FRSSE is not generally applied to the accounts of unincorporated businesses - and it's wholly deficient for that purpose - then I think UITF 40 can be generally assumed to apply to almsot all partnerships and sole traders in the UK.

But I'd be fascinated to know if anyone thinks otherwise, and if so in what format they do present accounts for these clients in accordance with the FRSSE, even when it gives no real guidance how to do so.

I'll give you one example why the FRSSE cannot apply to those businesses. Although supposedly intended for their use if you search all 273 pages of the latest version the word "partners" only comes up in the legislation section, not in the accounting advice and the word "drawings" does not appear once.

I therefore think it impossible to use the FRSSE in practice.

So, the UITF have definitely landed small unincorporated businesses right in it - as has the failure of the new FRSSE to address their needs.

FRSSE and UITF 40

Mike Wood | | Permalink

I think it is worth noting that the principles in UITF 40 are embodied in the new FRSSE (effective January 2005) under section 4, 'Revenue recognition', and paragraphs 29 to 34 of Appendix III. The new FRSSE applies for accounting periods beginning on or after 1st January 2005 - earlier application is not permitted.

The new FRSSE can be downloaded from the ASB website.

In line with UITF 40, paragraph 32 of Appendix III of the new FRSSE says that 'where the substance of a contract is that the seller's contractual obligations are performed gradually over time, revenue should be recognised as contract activity progresses to reflect the seller's partial performance of its contractual obligations. The amount of revenue should reflect the accrual of the right to consideration as contract activity progresses by reference to value of the work performed.'

Again in line with UITF 40, paragraph 34 says that 'the amount of revenue recognised on any contract for services should reflect any uncertainties as to the amount that the customer will accept and pay.'

It is the case with most professional assignments that few clients will pay for a half-completed job, even where the legal terms provide for the firm to charge for time spent whether or not the assignment is completed. Isn't it therefore the case that the firm's 'right to consideration' is not obtained in many cases until the assignment is complete and that revenue cannot be recognised until that point is reached? This may not be the legal form of the contract, but it is the substance.

Surely the whole of the substance of the contract is important, not (as the ASB implies in UITF 40 and the new FRSSE) a bit of it.

After all, UITF 40 attempts to interpret Application Note G to FRS 5. FRS 5 is titled 'Reporting the Substance of Transactions'. My interpretation above appears entirely consistent with the title of FRS 5. There are no grounds for identifying part of the substance of a transaction while ignoring the rest of it.

Does anyone else have a view on this?

agreement!!!

martinfoley07 | | Permalink

Michael
I am in complete agreement with your interpretation of the situation - see my earlier posting (where I asked those who think differently to correct me).

In most cases where a "fixed price" service is offered, no rights to fees whatever have accrued for part performance, either in substance or law. I can't see this can even cause people to blink, let alone panic.

It might be more muddied in contracts which claim to be purely time based, unless it is clear (explicitly or implicitly) that the overall service must be carried out in toto for any obligation to pay to be enforceable.

If it is not clear, as said before, the firm has only itself to blame - it should not be merrily running up hourly costs without advising (and billing!!)its clients, most especially small businesses.

Stalinism in accountancy.

Paulsoper | | Permalink

"UITF declarations do, of course, have the impact of being tax law."

No this is not true - Generally Accepted Accounting Practice necessary to produce a true and fair view for the purposes of Uk company law has legal affect for taxation purposes by virtue of FA2002 - but it seems patently clear that these abstracts and guidance notes with all of their uncertainty are anything BUT generally ACCEPTED accounting practice. Accepted by whom - promulgated by whom - the functions of GAAP are to produce an element of certainty, of comparability - true, but to apply them to an unincorporated body such as a partnership which is not a separate legal entity from the members who comprise it or a sloe trader is ludicrous.

cash accounting vs accruals accounting

martinfoley07 | | Permalink

I think small practitioners need to decide if they want cash accounting or accruals accounting for small businesses.

It is perfectly rational and defensible to argue for either, but the incredible argument that you can have some half way house (neither fish nor fowl) because you are small is ......well, words fail me.

I also am worried by the idea that qualified accountants can't decide what the pronouncements mean (see my earlier postings - again, those who think my understanding is wrong, please tell me).

What are we offering to clients, to persuade them to use qualified accountants, if we
(i) want cash accounting
(ii) can't decide what pronouncements mean !!!!!!!
Why would anyone want a qualified accountant on that basis!!!

If we want cash accounting, that is a perfectly rational position (but one which accountants have not previously taken). But if so, why does client want a qualified accountant at all for the purposes of the accounts? The most innumerate client or unqualified bookkeeper can keep cash accounts.

If we are unable to follow what I still think are eminemtly sensible and comprehensible pronouncements, why should a client use us at all?

Now of course if someone can demonsrate to me that my understanding of the pronouncements is completely wrong, I retract every word of the above!!!!!!!!!

UITF abstract 40

travisguy | | Permalink

Am I missing something here? Para 21 of Abstract 40 states ".... Reporting entities applying the Financial Reporting for Smaller Entities currently applicable are exempt from this Abstract...."

How many practices are actually affected by this Abstract, therefore ?

Cash accounting - a logical solution for the smaller business?

Paulsoper | | Permalink

HMRC a talking for smaller businesses of allowing a single portal for tax purposes, and of consistency in treatment - and yet here we have a graphic dilemma of the problem posed by accounting disclosure being considered, not in the real world, where impact on tax liability would be considered to be a relevant factor but in the lofty towers of the accounting establishment.

As a matter of urgency we should press HMRC to allow for income and corporation tax purposes the same election that is available for VAT purposes so that the liability for all taxes is based on cash received and paid - over the whole history of the business - any business - exactly the same amounts will be assessable as would be on an accruals basis - the timing would change of course, but the internal accounting records for these small entities would be consistent acThe recentross all taxes.

HMRC should also accept that the principles of FRSSE apply to all qualifying entities, sole traders, partnerships and small companies, unless they opt to apply normal GAAP, unlike the current situation where entities that are not subject to disclosure rules by company law are obliged by taxation law to follow principles that may well not be relevant to them, unless they choose to make themselves subject to them.

The recent Mars v Small case demonstrates that where an entity chooses to follow a particular line on disclosure it must accept the consequences of that disclosure, but for the smaller business there is no choice in the present system. Oh - and are we all unanimous in agreeing that the new disclosure rules do compel recognition of income at an earlier stage?

Andrew Goodall's picture

If you've just joined us from the Accountingweb wire ...

Andrew Goodall | | Permalink

See also UITF Abstract 40: Tax body seeks relief for firms regarding Tax Faculty guidance published on 5 May.

Certainty ?

Anonymous | | Permalink

A general observation:

What is wrong with the accountancy hierarchy, they seem to find it difficult to say what they mean, e.g.

We need a convention on how income is to be recognised for accounting purposes, this seems proper. Thus rules are produced, reporting standards are then published. The rules are not clear enough on their own and so guidance on how and when they are to apply is given, but this is sufficiently vague so as to itself require interpretation. The interpretation of the guidance to the rules is published (after a lengthy wait),....guess what there is still doubt !

As a shorthand to vague rhetoric I am a believer of setting out instances or examples as a good method of illustrating the application of a principles and rules. This at least eliminates doubt for many if note all cases. Perhaps this method would have helped hear

I do not feel sufficiently informed to join the debate on the substantive issue concerning revenue recognition under SSAP 9 and subsequent guidance, but I do now express my frustration ( which I suspect is shared by many practitioners dealing mainly with small and very small businesses)over the lack of clarity in guidence on how this matter will impact on them and their clients. There are an awful lot of us out here !

informal economy

oldersimon | | Permalink

My problem with this is that it requires small accountants with small business clients to introduce another complication, and another complication which requires small businesses to include in their accounts income which in their view is inappropriate because they have not been paid or even billed for it.

The more complicated the ruled get the more likely people are to throw up their hands and sink into the informal economy. The legal requirement for all accounts to be prepared in full accordance with GAAP (and soon IAS) is a nonsense for small business.

Andrew Goodall's picture

News

Andrew Goodall | | Permalink

TaxZone news will have more on this very shortly.

brian.mercer's picture

Why are we shooting ourselves in the foot (and perhaps the head

brian.mercer | | Permalink

It is saddening to witness that those at the top of our honourable profession are out of touch with the grassroots (and reality). I thought this only applied to politicians. I wonder how many (smaller general practitioner) members would agree that until the Accounts/Tax Return are/is completed - we don't get paid? That's the bottom line. We have little in common with the construction industry and whoever started this application of SSAP 9 to us is - well....

hmmmmmmm

martinfoley07 | | Permalink

Dear oh dear.
I don't want to understate any real cash flow issues that some professional firms may have from this pronouncement, but I must say they have no sympathy from me whatsoever.

Firstly, it strikes me that a clear implication from all this ( and stripping away the rhetoric) is that many firms have been trying to "cash account" without actually using those words - not a very good starting point.

Secondly, the pronouncements (subject to the confusion, partly caused by commentators who wish to confuse it seems to me) are logical, sensible and appropriate. I actually can't understand those who say otherwise. Those that do not find them appropriate or are (again stripping away the rhetoric) in essence arguing they wish to revert to cash accounting.

Thirdly, if a contract for services is conditional upon a service which is not delivered at the time the accounts are drawn up, I do not read the new pronouncement to say you are forced to pro-rate the total contract income, regardless of the fact that you have not fulfilled the contract. If I am wrong on this, I would be grateful to hear from others.

Fourthly, even the smallest practices should be looking at payments on account/standing orders etc from small businesses for modest billings/work scope as a matter of commercial good business sense, not be panicked into it because of some accounting pronouncement.

Fifthly, if your contract says a client must pay by the hours you clock, you owe it to the client to regularly advise him/her of the damage and bill regularly, not mount up an unknown liability.

Unless we wish to push for cash accounting for small businesses (and their tax computation) I see nothing untoward about this "change" at all - it seems to me to promulgate what should have been happening anyway.

brian.mercer's picture

Whoever mentioned cash accounting?

brian.mercer | | Permalink

I meant cash plus debtors of course.
I dispute that work in progress is relevant, because until that Bill is issued, a Client can walk away from you.
And yes, how we do need a nice lecture on the principles of good Practice (incl. cashflow) Management!

Andrew Goodall's picture

ICAEW Tax Faculty guidance

Andrew Goodall | | Permalink

The ICAEW's Tax Faculty published a note on 9 April (updated on 18 April) regarding Urgent Issues Task Force (UITF) Abstract 40, 'Revenue recognition and service contracts', published by the Accounting Standards Board on 10 March.

The complexity and continued uncertainty in this area are reflected in two recent articles in Taxation, by Mark Lee (28 April) and Robert Maas (5 May).

The faculty's note to members said: "In view of the importance to members of many of the issues dealt with in the Abstract, the Institute has prepared answers to Frequently Asked Questions to help members understand the implications of the new guidance."

In particular, it is worth noting that in paragraph 26 the faculty said: "The effect of recognising revenue and profit earlier than hitherto will in many cases result in a one-off increase in profits in the first year of application. Depending on cash flows, this may give rise to financial problems for some members when the resulting tax bill falls due.

"The [ICAEW] has joined with other professional bodies in liaising with the Inland Revenue to try and ameliorate the tax effects. Discussions are still at an early stage."

The faculty added that its Technical Enquiries Service is available to advise on practical aspects of the Abstract, and further guidance would be issued shortly.

See also the Any Answers query posted on 20 April: Are we all prepared for more tax?

Andrew Goodall
Editor, TaxZone

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New guidance issued 5 May

Andrew Goodall | | Permalink

See TaxZone news: UITF Abstract 40: Tax body seeks relief for firms.

The Tax Faculty has issued detailed guidance on the tax implications and confirmed that talks are to be held with HMRC in an effort to soften the blow for firms facing an additional tax liability payable on 31 January 2007.

Andrew Goodall
Editor, TaxZone