UITF 40 - the spelling of fear

UITF 40 is a series of letters and numbers to strike fear into the hearts of many accountants. But Simon Crompton believes that, with the correct approach, compliance with UITF 40 shouldn’t be such a big issue

It may seem like yet another piece of legislation to add to the pile and another process to learn, but rather than fight compliance, accountancy firms should embrace the opportunities UITF presents to improve their practice management. Accountants need to run their practices as businesses. Focusing on maximising chargeable time is all very well, but it is not effective unless you have the procedures and processes in place to ensure timely billing and collection of cash.

UITF 40 has been a long time coming. Revenue recognition guidelines drafted by the Accounting Standards Board (ASB) back in November 2003 prompted debate about accounting for revenue from contracts providing services, and the UITF was asked to provide guidance. Most of the requests referred to the professional service firms but UITF believes the same principle should be applied in accounting for all service contracts. On 10 March 2005, the ASB published UITF 40, Revenue Recognition and Service Contracts, giving guidance on the recognition of turnover from contracts for professional and other services in financial statements. Any accounts ended 30 June 2005 onwards are affected by the new standard.

UITF is a particularly pertinent issue for accountancy firms. Previously un-invoiced or uncompleted work was described as “work in progress” (WIP) and was based on cost value, with tax only charged once an invoice was raised. UITF 40 will result in WIP valued at anticipated selling price, a “fair value” which will increase tax liability. The Consultative Committee of Accountancy Bodies (CCAB) estimates that around 25% of accountancy firms will face a tax bill that is more than 50% higher than average when they adopt UITF 40.

But before you gasp and visualise your profits running to the tax man, appreciate that implementing UITF 40 will encourage you to bank your money faster than the most hyperactive contestant on The Weakest Link

! In my 20 years in this industry, one thing I have noticed is that accountants are reluctant to bill until the job is done - this attitude needs to change. To avoid suffering an increased tax burden, I recommend the approach is to reduce the WIP/debtor period as much as possible.

Time levels

Another tip I would advise is to monitor time levels carefully. One fundamental issue which I believe needs changing is the fact practices often bill per hour and not for the job. I recommend practices should provide a quote up-front for the entire cost of the job and manage time accordingly. That way, you have a better handle of your accounts and you manage your clients’ expectations effectively. If you are to agree on the price beforehand, this will avoid the client complaining that you have overcharged them and requesting a refund. If you neglect your timesheets and do not realise when you are over-servicing clients, you will invariably end up paying for it, either in terms of refunding a percentage of the job or by creating a disgruntled client who will take their business elsewhere.

Where the timesheets are concerned, you need to proactively implement a value limit - for example, set a rule that the WIP will not go above 100 hours and set up a system which will alert you if too many hours are being charged to an account. In addition to this, it’s essential to keep track of your invoices. It sounds so obvious, but often people become so focused on timesheets they lose track of who is paying for what.

Keeping track of your invoices and tabs on your timesheets will certainly help improve your practice management and make UITF 40 less painful. Another key element to consider which transcends administration (you’ll be happy to hear) is the business of customer relationship management. How transparent is your practice? There are clients out there that don’t have a clue what the accountant is billing them for. Again, this is where you need to view your practice as a business. You cannot afford to bombard your client with jargon and abbreviations. You need to make it clear to them exactly what you are billing them for and there will be no cause for argument at the end of the contract.

Taking control

In summary, UITF 40 should not be too hard-hitting if we all follow the eternal practice philosophy of not carrying too much WIP. A good practice management system is a fundamental part of controlling the WIP - one that lets you review and bill up to the minute, and one that proactively alerts you to potential recoverability problems or job over-runs before the event. Getting clients to agree on sensible engagement terms, delivering quality work on time and setting realistic client expectations is also essential.

A happy customer is a repeat customer. It’s time we had a mini revolution in the accountancy world. We need to operate practices as businesses, become more transparent and invest more time in customer management. If we adopt this philosophy, it makes compliance in all areas of accountancy a lot easier to implement. Regulation tends to pivot around issues of transparency and accountability. Get the processes in place which enable you to have easy viability of your audit trails and operate effective customer and practice management, and new legislation should be easy to adapt to.

Have a look at the bigger picture of the way you run your practice. Are you adopting quick fixes to cope with new legislation or have you realised you need to become more transparent and efficient in your overall processes? UITF 40 shouldn’t be such a taxing matter. Rather, an initiative to encourage you to keep your customers happy and get your money banked as soon as possible.

Simon Crompton is general manager of MYOB Accountants Division.