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Article contributed by Peter Upton
UITF stands for Urgent Issues Task Force. It is a group set up by the Financial Reporting Council to examine issues, which come into the public domain, which cannot be dealt with by the normal standard setting process.
The normal standard setting process for producing UK accounting standards is that a working group is set up under the auspices of the Accounting Standards Board (ASB), which is a standing committee of the Financial Reporting Council. It will consist of some paid staff of ASB and a number of volunteers. These volunteers are mainly accountants but do include non-accountants as well. When they have done their deliberation, they issue what is known as an Exposure Draft (ED) for consultation. The consultation period usually lasts for around three to four months. The working group will then reconvene to consider the responses and will then issue the accounting standard. This standard rarely comes into force until at least a year after it is issued. The process from start to finish of a new accounting standard is therefore generally about two years - hence the need for the body known as the UITF.
An issue arose in the arena of listed companies where companies were trying to recognise income as early as possible to maximise their reported profits. For example a computer maintenance company whose income was through annual contracts would recognise all the £1,200 income from a £100 per month contract in the first month i.e. the month that it issued the invoice for the work. This caused profits to be unrealistically inflated and so the UITF was convened to discuss the matter.
Their decision was that all income should be recognised when it was actually earned. Thus in the example of our maintenance contract £100 per month should be recognised as income in the company's profit and loss account. Therefore if the accounting period ended three months after the contact began then £300 would be recognised as turnover in year 1 and £900 in year 2.
Afterwards people began to realise that this had implications for sole traders and small companies in any sort of service industry. For several years professional firms have been required to value work in progress that was not invoiced in their accounts, but they were allowed to value it at the cost to the business and they did not have to include anything for the cost of the work done by the owners of the business i.e. partners or directors. Now all firms have to value the work done at selling price and there are no exclusions. Thus a small consultancy firm with a three-month contract in the past may have issued its invoice after the end of the contract and into its next financial year and thus delayed the payment of its tax for a year. Now it will have to account for the contract and pay its tax in the year in which the contract is carried out.
There is an ongoing furore over this due to the bringing forward of many tax bills of significant amounts. There is still lobbying going on but it looks likely to be in vain. The Government's response was to grant firms, which were affected by the change extra time to pay the increased tax bill. Click here to return to the Finance Practice Area
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