Under new rules that came into effect on 30 April 2010 the majority of personal injury claims (specifically Road Traffic Accidents) are now treated under the Fixed Cost scheme. How have people valued work in progress for a Law Firm under this basis and in compliance with UITF40? I imagine there must be a lot of 31.3.2011 year-ends where this has now had to be valued. Historically many accountants have relied upon the unknown outcome and valued WIP as £nil, however under the new scheme I cannot see how this can continue.
If a Law Firm has say 1,000 cases. The following situations will arise:
- A % of these cases will fail at any early stage due to bad claims/negligence etc and therefore WIP will be £nil (?)
- A % of these cases will fall outside the scheme, e.g. where liability is not admitted by the defendant insurer. WIP can therefore be valued as £nil if the outcome cannot reasonably be valued or known until settlement of the matter. A nominal value under FRS5 could be attributed based upon wage cost for example.
- A % of cases will be prior to Stage 1 completion (the defendant insurer is considering the claim) and therefore £nil WIP as liability is unknown?
- A % of cases will be prior to Stage 2 completion (the defendant insurer has admitted liability and the claim is being valued by the claimant)
- A % of cases will be prior to Stage 3 completion (the claim has been valued but there is some negotiation as to final quantum)
- A % of cases will have completed Stage 3, the judge has determined the claim, either by paper or oral hearing
Throughout this process, interim payments may have been paid to the claimant solicitor (e.g. £400 for Stage 1, £800 for Stage 2) which would reduce WIP by the corresponding amount.
On the expense side.........the firm has paid a referal fee in advance to obtain the case, lets say £750. Normally this would be prepaid over the length of the case, historically say 7 months so that WIP is matched with the expense. The treatment of prepaid referral fees would have to match the treatment of WIP as detailed above!
From any accounting perspective this seems incredibly complicated.
Any suggestions or thoughts would be appreciated !