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Contingent fee arrangements

The UK Accounting Standards Board (ASB) has commented on accounting for the cost of work performed under contingent fee arrangements that straddle a period-end.

Published: 5 May 2009

The ASB has commented on accounting for the cost of work performed under contingent fee arrangements that straddle a period-end, after the ICAEW drew attention to the diversity of views within the profession over the issue.

In July 2008 the ASB clarified that the resolution of a contingent event in the post balance sheet period is a condition that arises after the balance sheet date, and thus the position taken at the period-end should not be amended following the post-balance sheet resolution of the event. 

Guidance was not provided on the acceptability of two approaches taken to accounting for the cost of work performed under contingent fee contracts - expensing the cost as incurred or recognising the costs as WIP at the period-end. Some businesses and their advisers had since then had difficulty in establishing with certainty the appropriate accounting for these costs.

In a letter to the ICAEW, the ASB explains that the Board at its April meeting had noted the evolution of these two approaches, in practice, to accounting for contracts with contingent fee arrangements incomplete at the period-end. The Board agreed that UK standards currently permit either approach to the recognition and measurement of such costs at the period-end. Thus those preparing financial statements should apply their professional judgement to select the accounting policies most appropriate to the particular circumstances, in accordance with FRS 18.

This situation is unlikely to change until discussions underway at international level are completed, particularly over revenue recognition issues, and final decisions are taken in the UK over convergence with IFRS.