Amendments to FRS 5, UITF 40 and the taxation of professional firms

A collection of links, citations and useful resources.

Please note that this page has been archived and that links to resources may now be broken.

Accounting Standards Board

The Accounting Standards Board (ASB) issued their requirements on revenue recognition, in the form of an Application Note to FRS 5 ‘Reporting the Substance of Transactions’. Further information on this is available in the ASB press release issued on 13th November 2003, entitled ASB Issues Standard on Revenue Recognition. The full text of the amendment was published in the January 2004 edition of Accountancy magazine.

On September 23rd 2004 the Urgent Issues Task Force (UITF) issued Information Sheet 68 following 'requests for guidance on the subject of revenue recognition in respect of contracts for professional services'. The information sheet sets out 'matters discussed at the UITF's meeting in September' and includes a request for further research to clarify the interpretation of SSAP 9.

A draft UITF abstract on ‘Revenue recognition and service contracts’ was published by the Accounting Standards Board on 30th November 2004 and the full text can be downloaded in PDF 24kb/7 pages: ). The draft was announced in the press release Draft UITF Abstract on Revenue Recognition and Service Contracts (ASB PN 259).

The final version of the UITF abstract Revenue recognition and service contracts (UITF 40) was published on 10th March 2005 and can be downloaded in PDF format (6 pages). The abstract was announced in the accompanying press release UITF Abstract Published on Revenue Recognition and Service Contracts.

ICAEW and CCAB

The Institute issued an initial 'ICAEW Statement on FRS 5' on February 5th 2004. A week later the Tax Faculty issued a news item reporting on the statement and their discussions with the Inland Revenue (headed 'FRS 5 and revenue recognition') on February 10th 2004.

On March 5th 2004 the Financial Reporting Committee (FRC) issued a working draft of guidance on FRS 5 and the valuation of work in progress, which has the title of 'Application of FRS 5 Application Note G : ‘Revenue Recognition’ to contracts for professional services' in the draft. The consultation period ended on Monday 15 March, in time for a meeting of the FRC later that day. The Library & Information Service holds a copy of the draft Technical Release - for further details see our catalogue record here. Please note, the draft is no longer available on the website.

A short update was published on the members website on 1st April 2004, which stated that 'In the light of responses received following circulation of draft guidance on the impact of FRS 5 Application Note G on professional firms, the ICAEW is not yet in a position to publish final guidance.' The Tax Faculty also published a short news item reporting on this 'FRS 5 and the valuation of work in progress').

On September 13th 2004 the Institute published a short news article headed "Priority called for Revenue Recognition" which included the full text of a letter to the Chairman of the Urgent Issues Task Force (PDF 1 page) sent on September 10th 2004.

Following the release of UITF Abstract 40 in March 2005 the ICAEW published Revenue recognition and service contracts: Frequently Asked Questions to help members understand the implications of the new guidance. The FAQs were revised on 7th June 2005 and again on 10th August 2005 and these are now available on the Revenue recognition and service contracts page along with information on help available from the Technical Enquiries Service and an article on Application Note G by Alan Taylor, Institute Director of Practice Innovation.

The Tax Faculty commented on the implications of UITF Abstract 40 in the April 2005 edition of TAXline. Further details are available in the Tax Faculty news item headed UITF ABSTRACT 40: Revenue recognition and service contracts (9th April 2005). On May 5th 2005 the Tax Faculty published FAQs on the tax aspects of UITF Abstract 40 (PDF 55kb/6 pages) and these were updated on 11th October 2005.

The Institute published a range of supporting materials on UITF Abstract 40 for practising members on 10th May 2005 including standard letters, client work programme and a control sheet. The full range of support materials is available at UITF Abstract 40 Supporting Materials.

On 30th June 2005 the ICAEW published the press release CCAB in discussions with UK tax authorities to provide relief for businesses hit by tax charges on new accounting rules on behalf of the CCAB. The press release includes a link through to the full text of the letter sent to the Chancellor.

The article Practical application guidance of FRS 5 Application note G and UITF 40 to law firms, which was originally published in the July 2005 edition of Solicitors Group News, has been made available in full text on the Technical Policy website.

Following the letter from the CCAB, the Tax Faculty launched a survey through their website on 16th August 2005 with the aim of collecting data to present a case to the PMG for spreading of the potential tax liability.

On 10th October 2005 the Consultative Committee of Accountancy Bodies (CCAB), together with the Law Society, published the details of a joint letter and CCAB Memorandum 'The impact of UITF Abstract 40: A memorandum from the CCAB to the Paymaster General' (10 pages, Word format) sent to Dawn Primarolo, Paymaster General, on 4th October 2005. The publication of the letter and memorandum was announced in the press release CCAB and the Law Society provide evidence of potential hardship caused by UITF Abstract 40.

Following the Chancellor's announcement of UITF 40 tax relief in the Pre-Budget Report on 5th December 2005, the ICAEW issued the press release CCAB bodies and The Law Society welcome tax relief for providers of services on 6th December 2005. The Institute's Tax Faculty also issued the news item Pre Budget Report - UITF 40 and service contracts – spreading announced on 6th December 2005.

The Institute of Chartered Accountants in England and Wales published new guidance for members on the application of UITF 40 on 28th April 2006. The Guidance on the application of UITF 40: Revenue recognition and service contracts is available from the Institute website (PDF format, 10 pages) and provides a series of practical examples of the application of UITF 40. The guidance was announced in the news item Revenue recognition and service contracts on 28th April 2006 and later highlighted in the press release ICAEW publishes guidance on UITF40 on May 9th 2006.

In July 2006 the Institute's Tax Faculty published a Guidance Note on the tax aspects of UITF Abstract 40 (TAXGUIDE 5/06) which is available in PDF format from the Tax Faculty website. The revised guidance was announced in the press release Guidance Note on the Tax Aspects of UITF Abstract 40 and in TAXline weekly news update No 315 (week ended 15 July 2006).

The CCAB issued guidance on the UITF 40 on August 14th 2006 which is available through their website at CCAB Guidance on the Application of UITF 40 and can be downloaded as a 12 page PDF document. The publication of the guidance was announced in the press release CCAB guidance on the application of UITF 40 “Revenue recognition and service contracts" on August 15th 2006.

A news item in TAXline weekly news update No 321 for the week ended 26 August 2006 comments that 'The CCAB bodies are now working on a paper covering the tax implications of UITF 40 which it is hoped will be agreed with HMRC.'

The ICAEW published the Technical Release UITF 40 and taxation (TAXGUIDE 08/06) on 2nd October 2006. The Technical Release is available to download in Word format. The Technical Release was prepared by 'the Tax Faculty of the Institute of Chartered Accountants in England and Wales in conjunction with the Association of Chartered Certified Accountants, the Chartered Institute of Taxation, the Institute of Chartered Accountants of Scotland, the Association of Accounting Technicians and the Association of Taxation Technicians. It reflects discussions that those professional bodies have had with HMRC and has been agreed by HMRC.' A further note states that the Technical Release 'supersedes TAX 30/98 for accounting periods ending after 22 June 2005'.

TAXline weekly news update No 340 (week ended 14 January 2007) included a short article on UITF 40 focusing on the completion of tax returns.

HMRC

The minutes of the Corporation Tax Operational Consultative Committee meeting for 17th May 2004 include an item on Application Note G to FRS 5 with additional reference to the article 'Valuation of work in progress for unincorporated businesses' by Trevor Johnson (Tax Adviser, May 2004).

The HMRC issued a statement on 1st November 2005, on whether entities applying the FRSSE are required to comply with UITF 40. The details of this statement were published on the ICAEW's Revenue recognition and service contracts: Taxation Impacts & Guidance for Members' page at the time.

A helpsheet with the title 'Revenue Recognition in service contracts - UITF 40' (IR238) was published by the HMRC for the year ended 5th April 2006. This helpsheet was first included in the collection of helpsheets available from the 'Self Assessment: The Tax Return: 2005-06 forms and notes' page on the HMRC website, which was announced in the HMRC list of new pages on 6th April 2006.

Following the publication of guidance from the CCAB on August 15th 2006 the HMRC have stated that IR 238 may need to be updated and any amendments would appear on their 'Revenue Recognition in Service Contracts - UITF 40 - Help Sheet IR238' page, which provided a number of updates and information on work in progress at the time of writing (18th August 2006).

The HMRC initially provided guidance on 'How to spread UITF 40 Adjustment Income' as part of the 'Self Assessment: Additional Information and Help' section of their website on 22nd August 2006. A statement on the pages at the this time noted that the guidance provided 'a basic outline and more detailed guidance will be published in the Business Income Manual.'

HMRC later updated their UITF 40 page to include links to the CCAB guidance issued in August 2006 and to the ICAEW Technical Release TAXGUIDE 8/06 issued in October 2006. At the time, the HMRC website stated that 'This guidance has been agreed both with HMRC and a number of other accounting and tax bodies. HMRC has not reviewed or agreed any other guidance.'

In January 2007 the HMRC website stated that comprehensive HMRC guidance would be included in the Business Income Manual which is available through the HMRC website at BIM74200 - Revenue recognition and service contracts: UITF 40: contents & overview.

A helpsheet with the title 'Revenue Recognition in service contracts - UITF 40' (IR238) has been included in the collection of helpsheets available from the Self Assessment: The Tax Return - forms, notes and helpsheets section of the website. The version for the 2007-08 tax year is available at Revenue Recognition in Service Contracts – UITF 40 (Help Sheet 238, Tax year 6 April 2007 to 5 April 2008).

HM Treasury

The Pre Budget Report 2005, published by the Treasury following the Chancellor's speech on 5th December 2005 included a paragraph announcing that measures to provide tax relief to those firms affected by UITF 40 would be incorporated in the Finance Bill 2006. The announcement was made in paragraph 5.101 in Chapter 5: Building a fairer society (PDF, 203KB) of the Pre-Budget Report 2005.

The Finance (No.2) Bill 2006 was published on 7th April 2006. The bill sets out the details for the spreading of the adjustment in Clause 102: Accountancy change: spreading of adjustment and Schedule 15: Accountancy change: spreading of adjustment.

General reading

A listing of books and articles on the subject of Revenue Recognition and Professional Firms and more specifically, Revenue recognition and the taxation of professional firms. The list will automatically be updated as new articles and books on the subject are abstracted or catalogued by the LIS team.

The Library & Information Service also has a collection of books and articles relating to: Work in Progress and FRS 5: Reporting the substance of transactions.

Articles
Commentary and responses from firms

Baker Tilly

Income recognition and valuation of work in progress - technical briefing from Baker Tilly issued in January 2004 as part of their series of Professional Practices Group Technical Briefings. On 13th December 2004 Baker Tilly published an update of the position headed 'Update on revenue recognition in professional firms'. Additional updates on this issue have appeared in their 'Professional Practice' newsletter, which is available from the Professional Practice Group section of the website.

Baker Tilly published an update of the position on 15th March 2005 which is available at Revenue recognition for professional firms in both HTML and PDF formats.

BDO Stoy Hayward

In Summer 2005 BDO Stoy Hayward published an 8 page guide entitled 'Avoiding WIPlash: FRS5 and UITF 40 - what they mean to your numbers' which is available to download in PDF format from Revenue recognition - the implications for professional service firms. The guide includes a 'revenue recognition - service contracts' flowchart and two case studies.

Horwath Clark Whitehill

Revenue Recognition and Valuation of Work in Progress - briefing paper (2 pages, PDF format) published in March 2005.

Mercia Group

The Mercia Group Newswire - May 2005 included an update on Revenue Recognition with the option to download an excel spreadsheet with 6 examples to illustrate the impact of UITF 40. The examples show the differences between possible pre-UITF 40 and post-UITF 40 treatments of completed but unbilled assignments, incomplete assignments, incomplete assignments - using average recovery rate, incomplete due diligence reports, contracts on a 'no win, no fee' basis and contracts with distinguishable phases.

PKF

PKF published the article Who's afraid of Application Note G ? Revenue and profit recognition for professional firms on 31st August 2004 which included an Application Note G decision tree.

Smith and Williamson

A short news item entitled 'FRS 5 - Tax Shock for Professional Practices!' was published on the Smith & Willamson website in January 2004 which stated that their Professional Practices team had 'prepared a briefing to outline the accounting implications and the broader issues that the application note raises'. Further updates on application note G were published in their Professional Practices newsletter.

Commentary and responses from professional bodies

Association of Chartered Certified Accountants

In the early stages of the debate the Comment and Analysis on Key Subjects section of the ACCA website provided access to 'Work in Progress - FRS 5' an information page on the amendment to FRS5 and its impact on firms of service providers (such as firms of accountants and solicitors) from ACCA UK's Technical Advisory Service. Following this, the ACCA sent a letter to the Urgent Issues Task Force on 26th March 2004 calling on the task force to consider the differing interpretations of Application Note G.

In June 2005 the ACCA published guidance in UITF Abstract 40 – Revenue Recognition and Service Contracts (also available in PDF format).

On 20th January 2006 the ACCA published Technical Factsheet 130: UITF 40 as a follow up to their earlier factsheet. Technical Factsheet 130 sets out to 'consider if there is any scope for not having to apply UITF 40' and to 'note the ways of mitigating the impact including the tax spreading concessions recently announced'. The Factsheet was published in the UITF Abstract 40 - Revenue recognition and service contracts section of their Comment and Analysis on Key Subjects pages.

Association of Taxation Technicians

Association seeks clarification of FRS 5 imbroglio - paper (Word format, 3 pages) issued by the ATT on 4th March 2004 requesting an urgent ruling from the ASB on FRS5. The ATT published guidance (1 page, PDF) for members and their clients on 24th March 2004.

On 1st February 2006 the Association of Taxation Technicians and the Association of Accounting Technicians issued Guidance for small and unincorporated businesses In respect of FRS 5, Application Note G and UITF Abstract 40 which was published in the ATT press release ATT and AAT move to end confusion over UITF 40. This guidance was discussed in the article 'More on UITF 40' in Taxation on 16th February 2006, which noted that 'it would seem that the ATT and AAT's interpretation of the UITF 40 is somewhat different from that of the CCAB' (the CCAB includes the ICAEW, ICAS, ICAI, ACCA, CIMA and CIPFA). A summary of this article is available through LibCat, our online catalogue, here.

Chartered Institute of Taxation

Higher Tax Bills for Professionals: FRS 5 - warning from David Collison, Chairman of the Personal Taxes Sub-Committee of the Chartered Institute of Taxation (CIOT) on 13th January 2004.

The CIOT published a news item ('Application Note G and UITF Abstract 40') on 8th April 2005 requesting that CIOT members send feedback on the tax position relating to UITF Abstract 40 to the ICAEW Tax Faculty.

General Council of the Bar in England and Wales

The General Council of the Bar in England and Wales published 'Taxation of Barristers’ Income: Accounting Standards Board’s Application Note to FRS5 (Revenue Recognition)' on 5th March 2004, a short news article setting out the opinion of a working party established by the Bar Council. The article referred readers to Section 1B of the Taxation and Retirement Benefits Handbook which is titled 'Computation of Barristers’ Profits for Tax Purposes'.

In May 2006 the Bar Council issued Computation of profits for income tax purposes: Application of UITF 40 to barristers’ earnings which is available to download in PDF and Word versions. The new guidance was announced in a news item on 15th May 2006 and the Bar Council website states that these documents update the guidance given in the guidance note published on 10th March 1999.

Institute of Chartered Accountants in Ireland

The Institute of Chartered Accountants in Ireland published Interim Note for Guidance : UITF 40 and RoI Tax on 21st October 2005 which provides interim guidance on the tax impact of UITF 40 in the Republic of Ireland. The interim guidance summarises the actions taken by the ICAI and CCAB-I to date. On the same day the ICAI issued the press release 'ICAI raise issue of tax problems arising from new accounting statement with UK Government'.

Following the Pre-Budget Report 2005 the ICAI published the press release ICAI welcomes progress on taxation of 'work in progress' on 13th December 2005.

Institute of Chartered Accountants in Scotland

ICAS published FRS 5 application note – recognition and valuation of work in progress (WIP) on 4th February 2004. On August 10th 2004 a further update was published under the heading FRS 5 application note “revenue recognition” and work in progress (WIP) . Following the publication of UITF Abstract 40 ICAS published the press release Professional firms face accelerated tax bills on 29th March 2005.

Law Society

On 12th March 2004 the Law Society responded to the draft Technical Release published by the ICAEW. The Law Society response was published as Draft Technical Release on FRS5 Application Note G – Institute of Chartered Accountants in England and Wales: Comments of the Law Society of England and Wales (8 pages, PDF format).

The Law Society sent a Letter to the Chairman of the Accounting Standards Board on 9th August 2004 and issued the press release Tax confusion could hit solicitors on August 11th 2004, highlighting their call for Application Note G to be referred to the Urgent Issues Task Force.

In October 2004 the Law Society published Revenue recognition and work in progress in the context of professional services: How FRS 5 Application Note G applies to solicitors’ firms (15 pages, PDF format) as a submission to the Urgent Issues Task Force, giving the Law Society interpretation of Application Note G.

Following the publication of a draft abstract on Application Note G by the Urgent Issues Task Force in November 2004 the Law Society published their response as Draft Abstract on Revenue Recognition and Service Contracts: Urgent Issues Task Force - Comments by the Law Society of England and Wales in January 2005.

On 5th May 2005 the Law Society published a 'summary of the accounting standards relevant to the profession as a result of Application Note G to FRS 5, in particular the calculation of work in progress' in the document Revenue Recognition and Service Contracts: A summary of the accounting rules applicable to solicitors’ practices (7 pages, PDF format).

Accounting for solicitors' work in progress - campaign page added to the Law Society website on 12th May 2005 which provides a timeline of developments and the text of a letter sent to the profession in May 2005 with the intention of gathering 'information on the impact of the rules and the cashflow implications'. The campaign pages includes a number of relevant documents such as the full text of SSAP 9, the Amendment to FRS 5, UITF 40 and the Law Society Guidance Note Guidance note on the withdrawal of the cash basis (Accounting for solicitors’ work in progress).

Chancellor softens tax blow for firms - press release from 5th December 2005 following the announcement by the Chancellor in his Pre-Budget Report that professional firms, and many other small businesses will be able to spread the adjusted tax liability, resulting from the adoption of UITF 40, over 3 to 6 years.

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