Are we all prepared for more tax?

Are we all prepared for more tax?

Didn't find your answer?

Am I the only accountant who values work in progress in my own accounts at cost (incl overheads) but excluding the cost of any partner time?
I was concerned when the first comments were made on UITF Abstract 40, I then became a bit more relaxed and now I am back to seriously concerned.
As far as I was aware most accountants value WIP on the same basis that I do. If I have to value WIP to include an element of profit, including partner time, I will face a significant increase in WIP values and accordingly a substantial (potentially unaffordable)
one off tax hit.
Have I really been interpreting the Standards incorrectly all these years?
If not, how can today's interpretation of the Standards be so different from previous understanding by so many professionals?
Why have the accountancy bodies not been fighting our corner and does anyone have any suggestions or comments?
John

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By AnonymousUser
28th Jul 2005 15:32

UITF 40 and uncertainty
I am currently preparing the accounts of a firm of solicitors who, because of their year end, have to adopt UITF40 now.

I am facing a practical difficulty of how to value current work when the cost to completion is unknown and the client has been given a cost estimate within a range.

I wondered if these could be excluded on grounds of compliance with IAS 18, ie revenue should be recognised if the outcome can be measured reliably. Presumably therefore it should be excluded if it cannot be measured reliably.

The ICAEW guidance of 7 June merely compares IAS 18 and UITF 40, sidestepping a specific statement that they are consistent.

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By AnonymousUser
29th Jul 2005 07:48

Don't think so
Gerard,

I think that the argument you wish to use is the very one the "authorities" are trying to stop us using.

It is only my opinion but I believe that in the circumstances you describe, it will still be necessary to review each job to determine how complete, on a percentage basis, it is (in the solicitors professional opinion). This percentage should then be applied to the anticipated fee and the resulting figure is effectively your closing WIP.

I would agree that full provision should be made for any anticipated future costs in excess of future income, to ensure that profit is not over-stated but that is really a seperate excercise.

I believe that without detailed time records the year end "WIP valuation" could be a massive task where you have a large practice, since each job has to be looked at in detail.
At least, with a decent time recording system, WIP can be valued, including partner time, at full charge out rates and thereafter provision made against any balances the partners believe will not be fully recovered. (this could be done by using the average recovery rate over the past year or on a client by client basis)

I think that solicitors in particular will find the change in valuation principles very difficult to accept. I have seen more imaginitive varieties of WIP valuation in solicitors over the years than in all the other professions put together.

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By AnonymousUser
01st Aug 2005 10:25

uncertainty, not systems, is the issue
To clarify my original post, the issue is not how much WIP is on the clock at present, but how much more will be needed to complete the job, and then how much of this the client will accept.

In the past this has not been too much of an issue as the WIP at cost was likely to be largely recoverable even if WIP at charge was heading over estimate, and the exceptions were usually obvious and reduced to realisable value. The "band of uncertainty" between WIP at cost and WIP at charge therefore dealt with the majority of matters and valued all these at cost.

We are now faced with a situation where we have to forecast how much of this band of uncertainty we need to take to profit.

Clearly there are matters which are more certain than others and where the profit can be estimated reasonably reliably, but IAS 18 seems to recognise that if, at the year end, we cannot estimate the outcome reliably we should not recognise the revenue.

It maybe that the authors of UITF40 do not accept the corollary that if the outcome cannot be reliably estimated then no revenue should be recognised.

I was hoping the Institute would give some guidance on this, but they seem to be as unsure as to what UITF means in this situation as I am.

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By AnonymousUser
01st Aug 2005 11:49

No choice
Gerard,
the IAS 18 statement that profit should not be recognised unless it can be reasonably foreseen, relates to what would previously have been considered to be long term WIP.

UITF-40 effectively brought in to the same category, the WIP held by professionals and I would agree with you that if profit cannot be reasonably foreseen then it should not be taken. However, if past performance has shown that you achieve on average, say 85% recovery on charge out rates, then this is the percentage to apply to your WIP at charge out rates at the year end.

Your only alternative is to look at every job individually and to make a professional judgement on the percentage of completion, the ultimate fee and consequently the ultimate profit.

Depending on the number of clients, the second option may be possible but I will be doing the former and spend the time saved trying to bring fees up to date and chase cash so that I can pay this unwarranted stealth tax!

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By barryhallam
05th May 2005 15:02

Still unresolved
There was an article in last Weeks's "Taxation" by Mark Lee and another in todays issue by Robert Maas offering conflicting views on Application Note G and UITF 40.

This is clearly still an unresolved issue and apparently the ICAEW is currently preparing further guidance.

Watch this space!

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Andrew Goodall
By Andrew Goodall
05th May 2005 16:00

Guidance
Further to Barry Hallam's comment there is more on the Taxation articles, and Mark Lee has posted a comment, in response to Richard Murphy's Practice Tip on this topic dated 5 May.

Andrew Goodall
Editor, TaxZone

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Richard Murphy
By Richard Murphy
05th May 2005 13:42

I agree with David Honeyman re Point 2
Apportionment on fixed price deals is required

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Richard Murphy
By Richard Murphy
29th Jul 2005 11:43

John's comments
Can I endorse John's comments to Gerard?

I am 100% sure Gerard cannot duck this issue becasue it is difficult. It has to be done, and as he suggests. And, if there are no systems to ensure it acn be done now is the time to create them.

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Andrew Goodall
By Andrew Goodall
20th Apr 2005 16:38

Tax Faculty guidance and FAQs
John, this may help if you have not already seen it ...

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

The faculty 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."

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.

Andrew Goodall
Editor, TaxZone

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By Neville Ford
20th Apr 2005 18:16

WIP at period end
I have three comments on WIP and why it is not significant to me:

1. We bill our clients monthly, so work on assigments based on hourly rates or continuous supplies of service have no unbilled WIP at month ends.

2. Most of our services are fixed price deals, so if we don't finish the work then we won't get paid, hence WIP on these is nil as we only recognise income when it is certain to crystallise.

3. As we want our money we try and ensure that we get jobs done and billed by the end of the month, so there is very little carry over and anyway 2 applies then.

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By David160
20th Apr 2005 20:41

Neville I disagree with point 2
With fixed price deals you have to allocate the income prorata the labour, before and after the period end. So the portion of profit before the cut off must be allocated to before the cut off.

The almost certain result is that the deal is completed. Obviously, if the deal does not complete, then you can take the appropriate part of the loss before the cut off. I had this argument with Mercia training, who said that the above is correct.

Note the tie in with post balance sheet events. Where the event affects the situation at the period end, you have to go back and adjust.

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