A change in accounting policy such as we have had in the case of UITF 40 may necessitate a change to an actual accounting system. However, it may be much easier to just to adopt your time ledger.
Putting together the archive on UITF 40 meant going back and re-reading a whole range of articles, features and other contributions published in the last year and a half. Many of the early submissions are now out of date, as there was a massive amount of indecision as to what might apply in practice.
One of the early sticking points on UITF 40 was whether or not it accountants' WIP would be affected. Did we have to increase WIP to reflect partners' time?
We know now that UITF 40 is all about recognising and adjusting income by accruing it. This means that WIP needs to be adjusted but only to ensure that you are not double counting your staff costs on contracts where you are also recognising income.
This sounds very confusing, and invariably will be a major chore for many professional practices. However, as many firms keep very accurate time and fees ledgers, and if these are scrupulously clear of old and unrecoverable time balances, they can use them as the basis for WIP and accrued income. The alternative for those who do not keep time ledgers is to rummage through every file and make some sort of estimate.
In a small practice where you do not need to worry about including overheads in WIP, you could actually go one step further and treat the time ledger balance as your UIFT 40 income accrual, and disregard WIP all together. This view is my own and appears to fly in the face of GAAP, but there is some logic behind it.
It is all a matter of cost and benefit. To make a decent job of your year-end accounts you will need to:
- Scrutinise WIP,
- Revise UITF 40's provisions (from time to time)
- Look at each and every on-going contract
- Consider materiality
- Make the appropriate journal adjustments to your accounts
- Factor in the time it is going to take to do all this as well as record your work sufficiently well to be able to follow your workings next year.
Why bother when you could just keep a really tight and accurate time ledger and use its output instead? The reason why you may not want to do this is because you may feel that you will be recognising even more income than UITF 40 intended. This may be the case, but in most small practices this is going to fluctuate anyhow. Simplify your internal accounting and then you have more time for billing and credit control, and more cash. The sooner you recognise your income, the sooner you can bill it. It is just a matter of having the right systems in place.
If you bill regularly, UITF 40 may barely affect you. If you have always been billing regularly and keeping WIP low then you may be one of the practices that does not need to make any opening adjustment either.
Visit the
AccountingWEB UITF 40 archive for Richard Murphy's Practical Tips on WIP.
