Martin - surely you miss the point... An Ordinary Share is not a right to income at all. It only provides / allows for an income to be paid in the form of a dividend if whoever is in control of that income decides to pay an income in that form. You seem to be focussing on income rather than rights.
It is, of course, possible that a shareholder controls the distribution of the income of the company may have the necessary degree of control - but Mrs Jones didn't.
Huge numbers of companies never pay dividends. If you take the Lords viewpoint that you have to establish whether there is an arrangement at the outset, how are you ever meant to decide which shares have to be defined as "..substantially a right to income"?
Interesting that our government says they will legislate to effectively reverse the decision. If it's that easy, why didn't they do it years ago.
As another correspondent says, Mr Murphy seems to know what is "fair and right". But that depends upon your starting point - which he conveniently forgets to define!
The problem with this subject is..... that you only ever hear from people whose method is successful for them.
Personally, even though I hate them, I cannot see how our practice could function effectively without timesheets. We would, without any shadow of a doubt, make less money if we didn't have them. But that is just my opinion and our way of doing things.
What we don't hear from (with the exception of one brave, but anonymous, correspondent) are people who have abandoned timesheets and don't make it work. We know of only two practices within a 20 mile radius of us who don't run timesheets - and the grapevine tells us that both of them are in dire straits.
That issue doesn't apply the other way around. So, although timesheets may be a real bore - they are at least "safe"! Small wonder that the vast majority of practices (at least those of any size) will not be abandoning timesheets any time soon.
Mike - are you seriously suggesting.... that the ICAEW's most recent pronouncement is not a major back track on its previous position? And that they didn't have to do it because the AAT/ATT had the gumption to actually get off their backsides and talk to the the UITF (whoever they are!!)?
What the most recent guidance says (in essence) is that what constitutes a "right to consideration" must be considered in each specific circumstance. If it has arisen then revenue is recognised, if it hasn't then you carry forward as WIP.
In the context of the guidance given my view (and that of several other FCA's / FCCA's I have discussed this with) is that it is a perfectly sustainable argument to say that for a Part 2 Service Package no right to consideration accrues until it is complete.
So my position is not wrong - it is one position in a spectrum. I accept that I may be towards one end of that spectrum, but to no greater extent than you are at the other end!
So - on that basis, and in the spirit in which it is offered, - I will cover the bet. But I'll have the same bet with you that every case will simply turn on its own facts!! There is no substitute for doing one's job properly. IMHO any accountant who does not consider each situation fully and take the "best" position for his client (with appropriate disclosure etc)is guilty of negligence.
Martin, I don't agree...... that the logic of UITF40 is inescapable, at least as it was first interpreted.
We, like many service organisations and many of our clients, can separate our work into two distinct parts. Part 1 is stuff where we charge by the hour as we go. Part 2 is where we provide a service package (eg a set of accounts) for a fee - regardless of whether that fee is fixed or ultimately calculated by reference to the time spent.
It is true that we had all gone along merrly not accruing income for the Part 1 when we should have been - and that change is undoubtedly right.
But there is no logic in accruing income for Part 2 where there is clearly no "right to consideration" until the job is complete.
UITF40 was originally interpreted as saying that you had to accrue income for both types of work. But the recent ICAEW document on the subject (actually just a regurgitation of the joint AAT/ATT pronouncement on the subject) was a clear climb down, recognising that it is a perfectly legitimate accounting policy NOT to accrue income for Part 2 work. It's just that the ICAEW couldn't say publicly that it was a climb down because they had made such a mess of what had gone before.
As a consequence, most of the profession have missed this very important distinction. No publicity has been given to it.
So - in our own financial statements and in those of clients we will not be accruing income for Part 2 work. In my view it is part of an accountant's job to legitimately defer tax for as long as is possible - particularly where it is pure common sense to do so!
Fear of clients is unfounded We've been running with IRPC (now CCH) for about 8 years. For the first couple of years we asked clients if they wanted to join and got about 50% take up. But the admin was horrendous.
So, after a couple of years we bit the bullet and told clients we were making it compulsory - although we did it very nicely of course. Hardly a squeak. It allowed us to reduce the amount charged per client and made the admin really simple - one mailing a year.
We add the charge to the WIP ledger and just bill with other stuff when we would otherwise normally bill.
Our experience has been that having the cover is a useful marketing tool - we have picked up clients in competitive situations because of it, although that would never be a reason to take it on.
Yes there are some gaps in the cover. You just need to be savvy about that when dividing the block premium up between the clients.
Up front investment of time and resource is required to initiate fee cover - but I heartily recommend it to my fellow professionals.
I don't wish to be picky DP , but.... I didn't say it was endorsed by the UITF. What I said is that the AAT/ATT tell us that the UITF say their guidance is not inconsistent with UITF40. I think that is pretty clear.
My objective in my professional life is to do the best I possibly can for myself and my clients - some of whom are facing massive additional tax bills as a result of the previous interpretations, which now start to appear shaky. Everybody who understands accounts knows instinctively that it is simply not right that revenue should be recognised where (eg) I have done only 20% of the work towards producing a set of accounts at the year end.
I am not looking to be "saved in the courts". If I have followed the ONLY published guidance which has been stated by the UITF to not be inconsistent then don't I think that I need saving - I am right!!
I have had an exchange of e-mails with the ICAEW technical department this morning.They tell me they have the matter under discussion and that further guidance is likely to be issued shortly. Until then (I kind of think I know what's coming) I live in hope that we may be getting some common sense on the subject.
It seems to me that the key point...... is that, for the first time, someone has actually spoken to the UITF (whoever they are!) and got it from the horse's mouth.
The press release itself states very clearly (Nichola does not reproduce this) "The guidance issued today has been produced after discussions with members of the Urgent Issues Task Force and is not inconsistent with the Task Force's own interpretation of the Abstract and of Application Note G to Financial Reporting Standard 5, which the Abstract sought to explain. However, the role of the Task Force is to interpret the standards set by the Accounting Standards Board, and neither the Board nor the Task Force are in a position to endorse guidance which any professional body offers to its members"
In real speak that means that the UITF agree with the AAT/ATT interpretation - or at least agree that it is one valid interpretation. Unless or until that interpretation is changed by the AAT/ATT it seems to me to be comfortably the most authoritative interpretation, because the "hawks" (in which I include my own institute) have not had backing for their interpretation from the UITF.
I certainly feel quite confident that, if I prepare my own or a clients accounts in line with the AAT/ATT guidance, there is no way a tribunal or court could find that they were incorrect. By the same token, an accountant preparing accounts showing greater profits than justified by this new guidance could well be justifiably accused of negligence.
Of course, this whole state of affairs is completely unsatisfactory with the first companies applying UITF40 paying tax in only 6 weeks time. The so called "senior" institutes need to get together very urgently with the AAT/ATT and speak with the UITF with a view to issuing some combined agreed advice backed by all the institutes. If my institute don't do this then they are even more arrogant than I thought!
Until that happens I, for one, will consider this new guidance to be the guidance that should be applied. And I feel very comfortable doing so.
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.
I don't agree Firstly para 19 is not clearly about contingencies. It states very clearly that it is about both conditions and contingencies. If I find it commercially acceptable to have a term in my contract with clients saying that I cannot recover until the accounts are produced and accepted then that is a condition that is outside my control, and I am therefore forbidden by UTIF 40 from recognising the revenue.
There is nothing comercially nonsensical about having such a contract. In the real world of small practice we hardly ever bill for a set of accounts until they are finished anyway - so where is the difference?
The client leaving is a red herring - that is breach of contract and is dealt with under the quantum meruit principle - see Peter Vaines' submission in this week's Taxation.
I don't understand why we accountants are all getting so precious about suddenly wanting to recognise revenue! If we were our own clients we would, perfectly legitimately and without material risk, be advising ourselves to adapt our contracts to fit the circumstances. We do this all the time for our normal clients - IR35 proofing, legitimate splitting of income between husband and wife...... need I go on.
If we go to our clients who might be subject to UTIF 40 and say "You have a choice between paying a load of tax earlier and modifying your contractual arrangements in a non damaging way to avoid that" then I think I know what their answer is going to be!! And if you don't present that possibility to them then you deserve to lose the client. We need to do the same for ourselves.
And don't forget - this whole thing started as a measure to stop people recognising revenue early. It has highlighted the fact that we have all probably not recognised some revenue (eg monthly payroll bureau etc) when we should have been doing - but I cannot see that there was ever an intention to force us to recognise revenue when a client would laugh in our face if we tried to bill him for it.
and Again I agree with Richard that a properly run WIP system along the lines he suggests is vital to any practice.
But, whilst I don't wish to detract from the main thrust of what Richard is saying, I just don't agree with the distinction drawn between what everybody recognises as uncompleted WIP (on the one hand) and debtors (on the other hand). This is central to the whole debate.
If I have a contract with my client that says "I cannot recover from you the fee for producing your annual accounts until such time as I have completed that work and you have accepted it" then, according to para 19 of UTIF 40 I am expressly forbidden from recognising any accrued revenue at my balance sheet date where those conditions are not fulfilled. This is because there is a specified future event or outcome (the client's acceptance) which is outside my control.
Richard seems to feel that one cannot rely on a contingent event not external to the client relationship. Why not? Where does it say that in UITF40? Para 19 covers not just contingencies, but contract conditions. And my reading of it that it is very clear - revenue recognition will swing upon the conditions or contingencies in the contract unless, of course, the contract is some kind of sham. This is very clearly internal to the client relationship.
But, because of the going concern principle and the fact that I expect to complete that work and have it accepted in due course, I must carry forward the cost of the work as WIP in my balance sheet.
This is quite different to my debtors where the necessary conditions are fulfilled and where there is a clear right to sue for the income. With respect to Richard, there is no question of having to make a 100% provision at all.
Of course, if I want to continue to treat WIP the way I always have, I have to be prepared to have the contract I describe above with my client. Some may not be prepared to do this - in which case they must recognise the revenue on the basis Richard believes to be the case for all.
And to do all of this, whichever view you adopt, a comprehensive WIP system is a necessary part of the evidence needed to justify the treatment adopted.
My answers
Martin - surely you miss the point...
An Ordinary Share is not a right to income at all. It only provides / allows for an income to be paid in the form of a dividend if whoever is in control of that income decides to pay an income in that form. You seem to be focussing on income rather than rights.
It is, of course, possible that a shareholder controls the distribution of the income of the company may have the necessary degree of control - but Mrs Jones didn't.
Huge numbers of companies never pay dividends. If you take the Lords viewpoint that you have to establish whether there is an arrangement at the outset, how are you ever meant to decide which shares have to be defined as "..substantially a right to income"?
Interesting that our government says they will legislate to effectively reverse the decision. If it's that easy, why didn't they do it years ago.
As another correspondent says, Mr Murphy seems to know what is "fair and right". But that depends upon your starting point - which he conveniently forgets to define!
The problem with this subject is.....
that you only ever hear from people whose method is successful for them.
Personally, even though I hate them, I cannot see how our practice could function effectively without timesheets. We would, without any shadow of a doubt, make less money if we didn't have them. But that is just my opinion and our way of doing things.
What we don't hear from (with the exception of one brave, but anonymous, correspondent) are people who have abandoned timesheets and don't make it work. We know of only two practices within a 20 mile radius of us who don't run timesheets - and the grapevine tells us that both of them are in dire straits.
That issue doesn't apply the other way around. So, although timesheets may be a real bore - they are at least "safe"! Small wonder that the vast majority of practices (at least those of any size) will not be abandoning timesheets any time soon.
Mike - are you seriously suggesting....
that the ICAEW's most recent pronouncement is not a major back track on its previous position? And that they didn't have to do it because the AAT/ATT had the gumption to actually get off their backsides and talk to the the UITF (whoever they are!!)?
What the most recent guidance says (in essence) is that what constitutes a "right to consideration" must be considered in each specific circumstance. If it has arisen then revenue is recognised, if it hasn't then you carry forward as WIP.
In the context of the guidance given my view (and that of several other FCA's / FCCA's I have discussed this with) is that it is a perfectly sustainable argument to say that for a Part 2 Service Package no right to consideration accrues until it is complete.
So my position is not wrong - it is one position in a spectrum. I accept that I may be towards one end of that spectrum, but to no greater extent than you are at the other end!
So - on that basis, and in the spirit in which it is offered, - I will cover the bet. But I'll have the same bet with you that every case will simply turn on its own facts!! There is no substitute for doing one's job properly. IMHO any accountant who does not consider each situation fully and take the "best" position for his client (with appropriate disclosure etc)is guilty of negligence.
Martin, I don't agree......
that the logic of UITF40 is inescapable, at least as it was first interpreted.
We, like many service organisations and many of our clients, can separate our work into two distinct parts. Part 1 is stuff where we charge by the hour as we go. Part 2 is where we provide a service package (eg a set of accounts) for a fee - regardless of whether that fee is fixed or ultimately calculated by reference to the time spent.
It is true that we had all gone along merrly not accruing income for the Part 1 when we should have been - and that change is undoubtedly right.
But there is no logic in accruing income for Part 2 where there is clearly no "right to consideration" until the job is complete.
UITF40 was originally interpreted as saying that you had to accrue income for both types of work. But the recent ICAEW document on the subject (actually just a regurgitation of the joint AAT/ATT pronouncement on the subject) was a clear climb down, recognising that it is a perfectly legitimate accounting policy NOT to accrue income for Part 2 work. It's just that the ICAEW couldn't say publicly that it was a climb down because they had made such a mess of what had gone before.
As a consequence, most of the profession have missed this very important distinction. No publicity has been given to it.
So - in our own financial statements and in those of clients we will not be accruing income for Part 2 work. In my view it is part of an accountant's job to legitimately defer tax for as long as is possible - particularly where it is pure common sense to do so!
Fear of clients is unfounded
We've been running with IRPC (now CCH) for about 8 years. For the first couple of years we asked clients if they wanted to join and got about 50% take up. But the admin was horrendous.
So, after a couple of years we bit the bullet and told clients we were making it compulsory - although we did it very nicely of course. Hardly a squeak. It allowed us to reduce the amount charged per client and made the admin really simple - one mailing a year.
We add the charge to the WIP ledger and just bill with other stuff when we would otherwise normally bill.
Our experience has been that having the cover is a useful marketing tool - we have picked up clients in competitive situations because of it, although that would never be a reason to take it on.
Yes there are some gaps in the cover. You just need to be savvy about that when dividing the block premium up between the clients.
Up front investment of time and resource is required to initiate fee cover - but I heartily recommend it to my fellow professionals.
I don't wish to be picky DP , but....
I didn't say it was endorsed by the UITF. What I said is that the AAT/ATT tell us that the UITF say their guidance is not inconsistent with UITF40. I think that is pretty clear.
My objective in my professional life is to do the best I possibly can for myself and my clients - some of whom are facing massive additional tax bills as a result of the previous interpretations, which now start to appear shaky. Everybody who understands accounts knows instinctively that it is simply not right that revenue should be recognised where (eg) I have done only 20% of the work towards producing a set of accounts at the year end.
I am not looking to be "saved in the courts". If I have followed the ONLY published guidance which has been stated by the UITF to not be inconsistent then don't I think that I need saving - I am right!!
I have had an exchange of e-mails with the ICAEW technical department this morning.They tell me they have the matter under discussion and that further guidance is likely to be issued shortly. Until then (I kind of think I know what's coming) I live in hope that we may be getting some common sense on the subject.
It seems to me that the key point......
is that, for the first time, someone has actually spoken to the UITF (whoever they are!) and got it from the horse's mouth.
The press release itself states very clearly (Nichola does not reproduce this) "The guidance issued today has been produced after discussions with members of the Urgent Issues Task Force and is not inconsistent with the Task Force's own interpretation of the Abstract and of Application Note G to Financial Reporting Standard 5, which the Abstract sought to explain. However, the role of the Task Force is to interpret the standards set by the Accounting Standards Board, and neither the Board nor the Task Force are in a position to endorse guidance which any professional body offers to its members"
In real speak that means that the UITF agree with the AAT/ATT interpretation - or at least agree that it is one valid interpretation. Unless or until that interpretation is changed by the AAT/ATT it seems to me to be comfortably the most authoritative interpretation, because the "hawks" (in which I include my own institute) have not had backing for their interpretation from the UITF.
I certainly feel quite confident that, if I prepare my own or a clients accounts in line with the AAT/ATT guidance, there is no way a tribunal or court could find that they were incorrect. By the same token, an accountant preparing accounts showing greater profits than justified by this new guidance could well be justifiably accused of negligence.
Of course, this whole state of affairs is completely unsatisfactory with the first companies applying UITF40 paying tax in only 6 weeks time. The so called "senior" institutes need to get together very urgently with the AAT/ATT and speak with the UITF with a view to issuing some combined agreed advice backed by all the institutes. If my institute don't do this then they are even more arrogant than I thought!
Until that happens I, for one, will consider this new guidance to be the guidance that should be applied. And I feel very comfortable doing so.
Jon Gammon
FCA
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.
I don't agree
Firstly para 19 is not clearly about contingencies. It states very clearly that it is about both conditions and contingencies. If I find it commercially acceptable to have a term in my contract with clients saying that I cannot recover until the accounts are produced and accepted then that is a condition that is outside my control, and I am therefore forbidden by UTIF 40 from recognising the revenue.
There is nothing comercially nonsensical about having such a contract. In the real world of small practice we hardly ever bill for a set of accounts until they are finished anyway - so where is the difference?
The client leaving is a red herring - that is breach of contract and is dealt with under the quantum meruit principle - see Peter Vaines' submission in this week's Taxation.
I don't understand why we accountants are all getting so precious about suddenly wanting to recognise revenue! If we were our own clients we would, perfectly legitimately and without material risk, be advising ourselves to adapt our contracts to fit the circumstances. We do this all the time for our normal clients - IR35 proofing, legitimate splitting of income between husband and wife...... need I go on.
If we go to our clients who might be subject to UTIF 40 and say "You have a choice between paying a load of tax earlier and modifying your contractual arrangements in a non damaging way to avoid that" then I think I know what their answer is going to be!! And if you don't present that possibility to them then you deserve to lose the client. We need to do the same for ourselves.
And don't forget - this whole thing started as a measure to stop people recognising revenue early. It has highlighted the fact that we have all probably not recognised some revenue (eg monthly payroll bureau etc) when we should have been doing - but I cannot see that there was ever an intention to force us to recognise revenue when a client would laugh in our face if we tried to bill him for it.
and Again
I agree with Richard that a properly run WIP system along the lines he suggests is vital to any practice.
But, whilst I don't wish to detract from the main thrust of what Richard is saying, I just don't agree with the distinction drawn between what everybody recognises as uncompleted WIP (on the one hand) and debtors (on the other hand). This is central to the whole debate.
If I have a contract with my client that says "I cannot recover from you the fee for producing your annual accounts until such time as I have completed that work and you have accepted it" then, according to para 19 of UTIF 40 I am expressly forbidden from recognising any accrued revenue at my balance sheet date where those conditions are not fulfilled. This is because there is a specified future event or outcome (the client's acceptance) which is outside my control.
Richard seems to feel that one cannot rely on a contingent event not external to the client relationship. Why not? Where does it say that in UITF40? Para 19 covers not just contingencies, but contract conditions. And my reading of it that it is very clear - revenue recognition will swing upon the conditions or contingencies in the contract unless, of course, the contract is some kind of sham. This is very clearly internal to the client relationship.
But, because of the going concern principle and the fact that I expect to complete that work and have it accepted in due course, I must carry forward the cost of the work as WIP in my balance sheet.
This is quite different to my debtors where the necessary conditions are fulfilled and where there is a clear right to sue for the income. With respect to Richard, there is no question of having to make a 100% provision at all.
Of course, if I want to continue to treat WIP the way I always have, I have to be prepared to have the contract I describe above with my client. Some may not be prepared to do this - in which case they must recognise the revenue on the basis Richard believes to be the case for all.
And to do all of this, whichever view you adopt, a comprehensive WIP system is a necessary part of the evidence needed to justify the treatment adopted.