New Accounting Standard (FRS102)

 

                 

Just as we all have got used to accounting for the work in progress or accrued income on contingent fee cases, the rules are about to change. FRS102 is the latest accounting standard which may already be in use for some practices and for others is applicable for accounting periods beginning or on after 1 January 2015. Smaller practices may wish to adopt FRS105, the financial reporting standard for micro-entities. A practice meets the size criteria for micro entity if it does not exceed at least two of the following three thresholds in relation to a financial year: Turnover - £632,000, Balance sheet - £316,000, average number of employees – 10.

The revenue recognition changes on contingent fee cases are as follows:

Current position

Where the right to fees does not arise until the occurrence of a critical event, revenue is not recognised in the accounts until that event occurs. This only applies where the right to fees is conditional or contingent on a specified future event or outcome, the occurrence of which is outside the control of the seller. In simple, practical terms this has meant that work in progress or accrued income on “No win, No fee” work is not recognised in the accounts until there is a right to the fee which is usually when liability has been admitted and the insurance company has agreed that a fee will be paid.

FRS102 position

Under FRS102, revenue from the rendering of services is recognised when the amount can be reliably measured and it is probable that the work will result in a fee and both the stage of completion and costs to complete can be reliably measured. AS a result it is likely that revenue could be recognised at an earlier date than under UITF 40 and also likely that you will have to review the events between the balance sheet date and the date the accounts are signed to determine when accrued income on contingent work is recognised in the accounts.

 

The message is to take advice so that you do not fall foul of the changes resulting from the changes to the standard of which revenue recognition is only one aspect.