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WIP and CFA

WIP and CFA

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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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By carnmores
14th Mar 2012 18:07

first i presume that your client is big enough for UITF40

one assume that if it is CFA WIP then the partners are of the mind that it will be recoverable especially if insurances are in place

one does not assume that partners time has been logged as there is no requirement to WIP partners time

so i disagree with your point 1

 

as for point 2 and 3  i do not see why the WIP cannot be accounted for as normal and if you are concerned put a partners capital account no 2 not being released until funds are received - how is this different from any other WIP anyway? arent capital account paid out in stages anyway?

 

and why would the remaining partners need to get relief for the payments if they had already been taken into account in the profit share, surely your problems arise if the CFA is not sucessful so maybe the answer is to do the accounts as normal but adjust the individual leaving partners tax by the CFA WIP and then bring in any receipts to post cessation - this may be better tax wise  lower rates etc

 

 

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By carnmores
19th Mar 2012 13:12

not a word from you

!

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