News - More on UITF 40

The ATT and AAT issued further joint guidance on UITF 40 to their members on 19 December. This deals in more detail with accounting practice and specifically considers when revenue should be recognised in respect of the type of work typically undertaken by members in practice.
Guidance was issued in August 2006 by the CCAB, which incorporated with some small revisions guidance previously issued by the ATT and AAT, but added an introduction and several examples. In several areas, the new guidance now issued by the ATT and AAT might be thought to be at odds with the CCAB guidance. For example, the new AAT/ATT guidance says that 'The basic principle can be restated as meaning that before you can recognise revenue, you must have done that which you have undertaken to do for your client/customer'. The CCAB guidance says that 'UITF 40 applies the principles of AN G to service contracts and in doing so brings service contract accounting onto a similar basis to contracts for the supply of goods and services as set out in SSAP 9', a basis which it previously describes as 'the percentage of completion method, i.e. recognising profit gradually'.
On the specific issue of accountancy and tax adviser practices, the new ATT/AAT guidance says that in a situation where the obligation to the client is to prepare and submit the tax return, and the return has not yet been approved by the client, it should be accounted for as work in progress. The CCAB guidance, in example 3, says that in such cases 'revenue is ascertained in a manner appropriate to the stage of completion', and although this might not be calculated on a straight-line basis it is equally cannot be said to be nothing because a half-completed tax return is of no use to the client.
Asked about the apparent inconsistencies between the two sets of guidance, the ATT president, Jean Jesty, and the AAT president, Brian Palmer, issued a joint statement to Taxation as follows:

'We are aware that there is a view held by some that the guidance issued jointly by ATT and AAT conflicts with the guidance issued by the CCAB, in particular in relation to Question 3 of the CCAB guidance. We do not consider that any such conflict exists as paragraph 2 of the answer confirms that "... where the outcome of the contract can be determined revenue is ascertained in a manner appropriate to the stage of completion”. Paragraph 3 goes on to confirm that "The stage of completion is not necessarily determined on a straight-line, time incurred, basis but is influenced by the value to the client of the work done to date”.
'It is our understanding of those paragraphs that in the case of a simple tax return with a fee of a few hundred pounds there will be no value to the client in the early stages, but by the time the return is ready for approval by the client value will have accrued and should be recognised, whether or not the return has been signed by the client. This will not be the full value of the return (the fee) but the appropriate part of the value of the work contracted to be done that has been completed. In the case of more material returns it would be usual for value to accrue to the client at an earlier stage and revenue would be recognised at that earlier stage.
'The guidance issued jointly by the ATT and AAT, which is based on detailed discussions held with the ASB and UITF, attempts to explain those principles in a practical way for our members. Bearing in mind that for most practices the cost of undertaking detailed work in this area is out of all proportion to the value of the end result, a reasonable view must be taken using the available information to give a consistent result, year on year, taking into account whether the figures are material. The views expressed in our guidance are believed to reflect the statements within Application Note G issued by the ASB as understood by a substantial body of general practitioners throughout the country.'

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