All the accountants I have come across recently seem to have one topic on their mind – UITF40 and the advancement of the recognition of income in our own accounts as well as many of our clients.
Most of the discussion seems to revolve around how on earth we have ended up in this position. It does seem perverse that so recently we were criticising Enron for recognising income too early, and all of a sudden our own profession is telling us to do just that.
I have serious reservations about whether anyone to do with the wording of the interpretation of FRS5 has ever actually been involved in private client work, rather than the provision of a product such as an audit or the completion of a tax return. But ours is not to reason why.
There is already a wealth of advice from the various institutes about how we should treat the change of accounting policy.
Perhaps the most interesting question is around the tax treatment. Is the uplift treated as Sch. D (VI) income, and therefore not subject to national insurance contributions? Every little helps.
But it seems to me that the major problem that will affect us will be the funding of the tax on the uplift in the value of work in progress, or what will probably now be described as ‘incomplete contracts’, as a result of stating incomplete work at selling price rather than cost.
In January 2007, we are going to have to find a lot of cash for a higher tax bill. Any practice trading at the limit of what the bank will lend is going to be in severe difficulties – there are no extra assets to justify any higher borrowing levels. It’s the same business with the same assets; we’re just describing the assets differently.
I suspect the lawyers are looking forward to re-wording a few partnership deeds as well.
My experience is that practices have countless different ways of dealing with partner retirements, and many of these include annuities payable to the retiring partner, based on the value of ongoing work, or incomplete contracts.
Now that the accounts figure has been rebased, the legal jargon used in many deeds will be wrong. For example, in cases where the partnership capital is repayable over a shorter time span than the sale value of incomplete contracts, some practices will need to renegotiate those retirement terms.
The unfortunate sufferers in all of this will be the clients – if we’re paying our tax earlier, we’re going to be submitting many more fee notes, much more promptly and regularly.
Financially it’s sensible, but it will put a deal more pressure on the professional relationship.
At the very least there will be much more pressure on us to review our work in progress more carefully at the year end.
What a wonderful thought for those of us with a year end in December – an enjoyable exercise somewhere between Christmas and those last-minute tax returns?
Mark Spofforth is an ICAEW council member and partner at Spofforths
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