The ongoing saga of Application Note G (ANG) to FRS5 finally reached a conclusion on 10 March, when the Urgent Issues Task Force of the Accounting Standards Board (ASB) issued its conclusions on the cause of much legal market angst.
The document, known as UITF Abstract 40, helps clarify the situation and confirms that a substantial one-off tax hit faced by law firms is unavoidable.
A year-long debate has centred on how law firms should account for work in progress. In particular, it has been unclear since the November 2003 publication of ANG how revenue recognition might vary, depending on the type of work a firm conducts.
The ASB document confirms that revenues for work with external contingent events determining payment should only be recognised when the event occurs. More controversially, it says that revenues for short-term, contract-based matters should be recognised as the work is carried out. The changes are effective for periods ending on or after 22 June 2005.
Smith & Williamson head of assurance and business services Jeremy Boadle said the effect of ANG will be an increase in profits and a larger tax bill. “It will still be a significant tax burden that could range from around 5 per cent to as much as 20 per cent of existing profits,” he said.