UITF 40: Overtaxed and under-represented

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AccountingWEB member Andrew Porteous provoked an interesting discussion when he posted a question on the popular or should I say the unpopular subject of UITF 40

"My first question is who the blazes finalised this pronouncement without thinking about the real tax cost to businesses?"

More than 1,000 people tuned into this debate, which motivated the AccountingWEB team to get to the bottom of this curious new measure. Why are accountants riled by this subject? Is it because there is little understanding or do you just not like it? AccountingWEB's Dawn-Marie Dart caught up with some of the members who took part in the debate to get more of an insight.

Andrew Porteous, a par...

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08th May 2009 08:24

Interesting isn't it - 3.5 years on.......
.... I have come across this thread accidentally whilst researching something else.

UITF40 may be GAAP - for the moment. I see now that the international standards setters are revisiting revenue recogniton, using the principle that you don't recognise revenue until (essentially) the customer has something "under his control". That would reverse UITF40 if it becomes GAAP. A return to accounting sanity.

Of course, we have adopted UITF40 both for ourselves and all relevant clients - but I don't know of anybody who actually thinks it is right.

And I wonder just how many businesses around the country geared up heavily on the back of accounts that included profit they hadn't really earned and who now face insolvency as a consequence. UITF40 is just another example of the muddled thinking and departure from common sense financial prudence that has led the economy into the position it now finds itself in.

Emile Woolf was right all along. The sooner UITF40 is consigned to the accounting dustbin the better.

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03rd Nov 2005 17:16

re: sandwich making revisited

I think there are a number of issues you need to address before assuming UITF 40 applies.

Firstly is there a separate contract for services? If not then UITF 40 does not apply. Separate itemisation of parts and labour would not of itself constitute two contracts or even one divisible one.

Secondly if there is, or if some of the contracts are for services (ie there is no supply of goods element), then is the affect material? If the average length of the job is 1 to 4 weeks I doubt it.

If it is material then you need to establish how much cost to bring against that revenue. This may be more than the book WIP and should at least incporporate the costs that would have been incurred had you billed the job at the year end. This might then cause you to reconsider the second point.

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31st Oct 2005 10:59

Sandwich making revisited
If we could return to the sandwich making example, I have a real life example. I have a client who repairs and services certain types of machinery and charges, broadly, on a time and materials basis. In effect just like a car garage but the jobs typically take one to four weeks. The time charge and parts charge are separately analysed on the invoice.

The client has adopted the FRSSE and historically, the contracts have been valued on a SSAP9 short term contract basis at the year end. From next year end, I have been advised that the contracts should be accounted for on a “Revenue recognition” basis.

By the time the final accounts are prepared, the amount billed will be known so the recovery rate is easily assessed. So it seems that profit should be recognised even on contracts at a very early stage at the year end. E.g. even the hours spent taking the machine apart prior to starting the servicing should be valued at the effective charge out rate. Do others agree?

The question then arises on parts and when (or if) they should be recognised at sales value. In the past, when parts have been booked to jobs has not borne any relationship to when they are used. As they were accounted for as WIP at cost, it has made no difference to the accounts. It seems to me that if they are to be recognised at sales value, this should probably be when they are fitted. Any other trigger point thoughts? Or should parts be accounted for as WIP at costs with no revenue recognition as per old SSAP 9 basis and hours as Services (i.e. back to the hypothetical sandwich question) – I can’t see that as correct?

This is a smallish business and any solution needs to be kept simple and not create too many practical difficulties in identifying the status of jobs either in the future or for the comparatives and prior year adjustment. There is therefore a temptation to recognise revenue on hours at charge out but to treat parts at cost as short term WIP!

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By Anonymous
27th Oct 2005 09:54

ICAEW Policy on UITF 40 restated
This month's Practice Society newsletter has landed on my desk and contains a comment on the previous article ("Claim the FRSSE and escape UITF 40") that I mentioned in earlier postings. The new article states:

"...the ICAEW considers it highly unlikely that the argument that UITF 40 may be avoided in this way can be sustained. Practitioners may place themselves - and their clients - at unnecessary risk of challenge, in particular from HMRC, if they advance it."

The Practice Society newsletter also now contains a statement that "Views expressed herein do not necessarily reflect those of the Institute or its policies".

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By Anonymous
11th Oct 2005 11:41

JohnR see Mark's posting of 30/9.
My advice is to just hold fire and wait and see for the moment. You won't be preparing any UIFT 40 tax returns until next year anyway.

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10th Oct 2005 15:44

Near unanimity...
I'm aware of one ACCA comment which pushes back the start date for FRSSE entities by a year, and one article in the practice newsletter which I understand to be personal to the author. There are also plenty of articles in the tax press, but not from financial reporting specialists.
Against that we have statements from ICAS, the ICAEW, the ASB press release (which is clear about the meaning of UITF 40) all saying that the basic principle is 'recognise income on the basis of proportional completion'. The chances of getting the Revenue (or the Commissioners) to agree that this is not the case because of a technical argument based on the interaction of UITF 40 and the FRSSE seems absolutely minimal to me. Completing tax returns on that basis seems, therefore, to be extremely dangerous.

Mike Truman

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By Anonymous
11th Oct 2005 09:42

Personal comment?
Mike - what is your source for saying that the comment in Practice Society is personal to the author (Alun Morgan)? Nowhere in the newsletter does it say this. Indeed, on the front page are the words "From The Institute of Chartered Accountants in England & Wales".

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20th Sep 2005 12:08

UITF 40 et al
Personally I am not too bothered about UITF40 as our firm has pretty good control of WIP.

What upsets me more is that nobody (incl the institutes) have told me categorically whether it applies to my firm or not, us being a typical small accountancy practice. There is little clear guidance with respected commentators seemingly unable to reach a consensus.

I do also wonder whose bright idea it all was and who appoints them (assuming that they are not self-appointed).

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20th Sep 2005 11:36

Jon needs to think again

You're wrong to refer to WIP. UITF 40 is not about WIP. It's about revenue recognition. And sales do include profit.

And as Mark Lee and others have said here before, by all means carry on with your policies - but if you do expect a host of investigations on you and your clients - and a mass of PII claims for failing to account properly - the likeihood of which will be very high as every client will win when they claim the costs of their penalties and investigation from you.

To continue to account as you suggest will not just be wrong - it will be foolhardy to the extent of being economic suicide.

Richard Murphy

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20th Sep 2005 13:59

Look at the guidance from the ICAEW
It is a little unfair to criticise the ICAEW for
(a) failing to stop this - the standard setters MUST be allowed to recommend / require an accounting treatment on the basis that it is correct - (that's their call)without interference from vested interests (which is what the ICAEW would be), and

(b) failing to provide adequate guidance - the stuff they have made available is excellent, clear and unambiguous. (see the links in the various resources quoted above)
We will frequently criticise clients who object to accounting treatments that give them the "wrong answer", but this time we are on the receiving end. Unpleasant, but doesn't change anything - think about the client who wants to undervalue stock to reduce profit. (To the question "What is your stock value?" I once received an answer "Tell me the profit and I'll work out the stock figure")

The bottom line is that accounting standards must be drawn up without considering the implications for businesses - it is the statutory job of the Board, and UITF to prescribe true and fair without fear or favour. Our job is to apply it, whether we (or our clients) like it or not!

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22nd Sep 2005 09:42

Peter's accounting
Peter Ruancres is wrong about his analysis of UITF 40. First of all, making a sandwich is about the supply of goods. WIP rules apply. UITF 40 is about the supply of services. It is about revenue recognition on such supplies.

And if Peter is not aware, revenue recognition on long term WIP has been an acceptable accounting concept for a very long time – most practicing accountants now cannot remember a time before SSAP 9 set the rules on that issue.

Put simply, accountants who deny the validity of UITF 40 are asking for trouble for themselves and their clients. That’s not sound professional conduct.

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By Anonymous
22nd Sep 2005 11:06

Jon's comment about not being too bothered about
UITF 40, as his firm stay on top of their WIP gives an insight into the real problem here. Many firms are just slack in their own bookkeeping practices - if you have always run a tight ship, and billed regularly (and collected your debts in time), the UITF adjustment will not be too horrendus.

As commented below the ICAEW has published a great deal of clear information on this subject, and there have been numerous articles in all the main tax and accounting publications. It is up to practitioners to keep themselves up to date. Having been a sole practitioner and registered auditor at one stage, I know just how hard that can be.
It is a case of being highly disciplined with your time and work practices, and good time management.
For those who think that they will be stung with a huge tax bill at year end:
- get on top of your WIP now, and start billing/change your billing practices.
- operate an efficient credit control system,
and if all else looks as if it is failing... make the partners and expensive staff take their holiday just before the year end.

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22nd Sep 2005 14:10

Sandwich making
If, as a customer, I supply the bread and filling and pay for making the sandwich, that is a supply of a service.

If I supply only the bread, pay for the filling, and on a time basis for the sandwich, there are two contracts, one for supply of the filling (goods) and one for the time making the sandwich (service).

If I am quoted only one price for both the filling and the making up is it a supply of goods or a service, or does the supplier have to make a notional adjustment to split the contract into each element?

If I then decide to have my sandwich toasted is the extra cost a supply of goods or a service?

Although these are fairly facile examples they do show the difficulty of deciding in the real world whether something is a supply of goods or a service, and the nonsense therefore of having a different revenue recognition point depending on the answer.

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22nd Sep 2005 18:34

So how many...
sandwich shops will be half way through making a sandwich at midnight on their accounting date?
And would that be just the one sandwich? Or are we feeding the 5,000?
What is it accounting standards say about materiality?
We need to focus on when this REALLY makes a difference to the answer...accountants, lawyers are a good starting place. I wouldn't worry about sandwich shops and hairdressers, window cleaners, manicurists etc etc etc They do supply services, but not under a contract which is ongoing. If it ever arises it will never be material, and they are not what UITF 40 is directed at. Specifically it advises providers of services under ongoing contracts how to deal with work which is incomplete and/or unbilled at the accounting date.

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By Anonymous
23rd Sep 2005 00:29

Hear, hear!
Lets cut the crusts, and stick to the main issues.
On a far more serious note, has anyone squared up the UITF 40 problem to the world of book publishing?
I think there are some rather peculiar problems. I would be very interested to hear from any professionals trying to square up UITF 40 with book publishing accounting practices.

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23rd Sep 2005 11:13

We now need to work out what to do
Regardless of what some might say we have to now accept that we must live with UITF40. Despite the "pronouncements" of our supposed betters in the standard setting authorities UITF40 is intuitively wrong in the way that it applies to accountancy practices and similar. I am convinced that this is the overwhelming view of the profession, and that view is not just held because it has a direct impact on us. The UITF (whoever they are) do not have a monopoly on being correct!

But we have to move on from that and decide what to do about it.

Firstly, we need to get real on this "you need to get your house in order / bill earlier / educate your clients" nonsense. It just isn't going to happen to any material extent in the real world.

As I see it (but others may have other ideas....) we have two options to mitigate the effect:-

1: Invoke the "true and fair" override. Definitely arguable in light of the many distinguished commentators who say UITF40 is wrong. But dangerous and inviting conflict with the Revenue.

2: Use the get out within UITF40 of not having to recognise revenue if there is a post year end event outside our control and which is critical to the right to consideration. With the right engagement letter this is definitely achievable.

Neither of the above work for segments of work (eg advice on company car ownership) which are already complete but unbilled at our year end. In truth we probably should always have recognised that as revenue.

Ask yourself this question. If you had an accounting firm as a client and your engagement partner didn't flag up and fully explore these possibilities for you - what would you expect that client to think of your service? He might even be able to sue you for his loss.

Why do we get all precious about this just because it is our own businesses that are now in sharp focus? Let's get to work on doing what we would do for clients - devising ways to take the edge off this.

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23rd Sep 2005 14:09

Born dull!
No wonder people think accountants in practice are dull.

I post a light-hearted example to illustrate a serious point, and some people take it literally.

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23rd Sep 2005 17:18

What's this nonsense
Why does Jon Gammon say "Firstly..this "you need to get your house in order / bill earlier / educate your clients" nonsense .. just isn't
going to happen to any material extent in the real world."

If you look at the AVN / AccountingWEB survey of 123 accounting firms the best firm had -0.5 debtor days (yes, that is minus a half) and minus 21 days WIP.

Top quartile, which is perhaps more representaive, had 50 days debt and 16 days WIP - a tolerable 2 months or so. Now, 16 days WIP is not going to cause an undue UITF 40 problem. But the lowest quartile had 60 days WIP (and this, remember, is from firms interested enough to take part)and 97 days debt on top - well over 5 months unpaid turnover in other words - which I call madness.

What this shows is that taking the risk of daft engagement letters and true and fair over-rides isn't needed. Just be business like - and you'll get a tax and cash flow benefit. What is the problem with doing that? Isn't this the real world solution? All others are, frankly, just asking for trouble.

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By Anonymous
28th Sep 2005 10:10

So FRSSE adoption does mean no UITF 40!
In spite of considerable commentary to the contrary, it seems that the ICAEW now accepts that the adoption of the FRSSE would mean that UITF 40 does not have to be applied in the case of smaller entities. I understand that the ACCA technical release on the subject clearly states that UITF 40 does not apply and I suspect that this has prompted the ICAEW to state the same. (See September issue No. 25 of the Institute's Practice Society Newsletter which arrived on my desk this morning).

As a small practitioner and affiliate of the ICAEW it is good to see that the ICAEW are at last stating that the commonsense approach can be adopted.

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28th Sep 2005 11:35

Maybe we should ask the ICAEW how we prove we've used the FRSSE
This is a big question.

How many people have an accounting policies note in a set of unincorporated accounts?

Maybe we'll need one!

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By Anonymous
28th Sep 2005 11:39

Depends when your accounting periods commences.
If before 1.1.2005, you can rely on old FRSSE, if on or after 1.1.2005, then the updated 2005 FRSSE applies which unfortunately includes the salient parts of UITF 40 in its appendix.

As accounts have to be prepared for tax under UK GAAP, even if you ignore FRSSEs altogether, I would say that you are leaving yourself terribly exposed.

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By Anonymous
28th Sep 2005 17:15

I think you have missed the essential bit here -
follow the 2005 FRSSE and you will see that you have to follow the principles of UITF 40 as the ASB have been careful to include it in the FRSSE guidance notes.

The reason for this is because the 2005 FRSSE was drafted before the UITF was finalised. It does look daft, because what we have in effect is an abstract which says it is not required if the FRSSE is used, and a FRSSE which says the principles of UITF 40 are need to ensure that the accounts are prepared along the lines of acceptable accounting practice etc.

This link explains it from the ICAEW view point: (see page 8) http://www.icaew.co.uk/viewer/index.cfm?AUB=TB2I_78336&tb5=1

I have been to the ACCA website and I see that they appear to take a slightly different take. The mystery deepens, and I will try and check it out in the moring.

What foxes me is what is going on at the ASB, not the ICAEW. If businesses who adopt the FRSSE should also recognise revenue as per UITF 40/ANG etc to produce T & f accounts, why exempt it?

What a total, total, total fiasco!

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By Anonymous
28th Sep 2005 12:57

Exemption applies to new FRSSE
Nicki - the ICAEW have stated in their newsletter that the NEW FRSSE provides the exemption and I quote:

" .... The ACCA technical release, though, clearly states that as the revenue recognition provisions of FRS 5 are included within the new FRSSE, UITF 40 does not need to be applied, providing that the FRSSE is claimed .... Conclusion: Claim the FRSSE and escape UITF 40."

As the Practice Society newsletter states on the front "From The Institute of Chartered Accountants in England & Wales", I take it that this is official policy rather than just the author's personal view.

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By Anonymous
29th Sep 2005 17:43

My point is that the ICAEW have OK'd exemption!
Nicki - Thanks for the information but I understand most of the logic on which the arguments are based. The point I am trying to make is that an official Institute publication distributed to its practising members has now stated categorically that the new FRSSE gives small practices/businesses a let-out. Surely, if the Institute (and the ACCA) makes such a pronouncement, my or your personal interpretation of the rules is irrelevant!

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By Taxi
30th Sep 2005 12:04

The guidance I am relying on comes from the guidance
issued by the ICAEW in conjunction with the ASB. The Practice Society is part of the ICAEW, but they seem to have drawn their ideas from the ACCA.
In the circumstances I back the ASB guidance.

Accounts for tax need to be drawn up using GAAP and on a t & f basis, and although I think I would greatly enjoy putting the various arguments to HMRC, I will be backing UITF 40. It is now GAAP and what interests me is what is correct for tax purposes (although this foray into the depths of accounting practice setting has been very enlightening).

There is an argument that if you take the ACCA view of the FRSSE, then if drawing up accounts under the FRSSE, you may have to make a UITF 40 adjustment for tax to ensure you are within GAAP anyhow!

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By Anonymous
03rd Oct 2005 21:36

Did I hear something about the last word...?
The ICAEW said in Tax 30/98 "Profit cannot be deferred by leaving jobs in WIP after they have reached a billable stage". That was in connection with the change over from the cash basis. It makes commercial sense to bill regularly.

I agree that a spreading relief is due, but in this instance only for barristers (and then only those who have not deliberately built up huge WIP balances - which is apparently what one does when one is trying to keep income low for the CSA/divorce). Accountants can all sue for unpaid fees, and they can also put bad debt provisions into accounts.
No fun for some partners leaving partnerships though, so perhaps the ITTOIA should be amended to give relief when a leaver faces a tax liability for income which he had not received. That could of course be resolved by amending the partnership agreement too.

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03rd Oct 2005 12:37

GAAP Unanimity
To quote from my own article:

"The hard truth is that I know of no specialist in financial reporting who is arguing about the effect – it is only those of us in tax who are still in dispute. And frankly, if the Revenue ever took a case to court, it would not call tax advisers as expert witnesses; it would quite rightly call auditors and financial accountants.
It might call someone from the CCAB. Ian Morris, its Chairman, was quoted in their press release on the subject (30 June) as saying ‘Many firms will now need to recognise turnover in respect of ongoing professional work as that work progresses by reference to the proportion of the work completed, rather than only when contracts are completed’.
So if HMRC take a case to court to establish what GAAP is in this area, there is virtual unanimity from the accounting side of the profession. We do not have to like it to accept that it is GAAP."

I originally had a couple more examples of quotes from leading financial reporting accountants that I had to cut to copyfit.

What I find really sad is that this attempt to pretend that nothing has happened has allowed the government to get away without providing a spreading provision. We've been too busy shouting at each other and not at them.

Mike Truman

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04th Oct 2005 23:38

UITF 40/FRSSE- expelling some myths
Not wanting to continue this discussion further but.....

1- The ACCA technical release suggesting that FRSSE entities do not have to apply UITF 40 has been around for a couple of months now. Here is the link with full detail http://www.accaglobal.com/pdfs/members_pdfs/compendium/128.pdf . The ACCA would only have come out with this line after full consideration.

2- The Practice Society article (which I have not seen) is not the first ICAEW badged article to arrive at this conclusion on the FRSSE/UITF40 issue. CCH's "The weekly tax news" newsletter highlighted this on 29 August 2005.

3- As well as the above tax newsletter highlighting the FRSSE issue, the ACCA and the Practice Society have also raised this. Emile Woolf has also written numerous articles querying the basis of UITF 40. I would therefore dispute Mike Truman's assertion that the accounting side of the profession is unanimous on UITF 40.

4- The issue over the claiming of the FRSSE in sole trader and partnership accounts is dealt with by the ACCA within the following guidance http://direct.accaglobal.com/e_article000445571.cfm?x=b5shkjr,b205LqPn . I think this gets over the argument against the FRSSE proposed by Richard Murphy.

5- Nicki states that the 2005 FRSSE was drafted before UITF 40. UITF 40 (final version) was published one month before the FRSSE (final version) was. The FRSSE managed to incorpoarte legislation laid by another body a month beforehand- I am sure that the ASB could have managed to bring in something which they actually published themselves within the same timescale, had they wished to.

6- The ACCA technical release mentioned above, has a far more accurate view on the IAS implications. It also highlights the replacement of UITF 40 by a UK version of IAS 18. It says by Dec 2005, the ASB now say by Jun 2006. IAS 18 will take most businesses back to status quo.

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