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Associated legal terms

Accrual method of accounting

An accrual method of accounting records income and expenses when they are earned or incurred, not when cash is actually received or paid. In legal practice it underpins financial statements used in company law, commercial contracts, insolvency, tax, banking, and litigation involving loss or valuation.

Across the UK and Ireland, accruals accounting is required for most companies under company law and accounting standards (for example, UK-adopted IFRS or FRS 102 in the UK, and corresponding standards in Ireland), and is the default basis for statutory accounts filed with Companies House or the Companies Registration Office.

In tax law, the concept is reflected in provisions requiring trading profits to be calculated on an “earnings basis” or in accordance with “generally accepted accounting practice” (GAAP), subject to specific tax adjustments. The term itself is not generally exhaustively defined in primary legislation, but is embedded through references to GAAP and accounting standards and is explained in HMRC and Irish Revenue guidance.

Usage and meaning are broadly consistent across England and Wales, Scotland, Northern Ireland and Ireland, making the accrual method the standard benchmark for assessing profit, loss and solvency in most legal and transactional contexts.

Performance ratchet

A mechanism that determines the eventual equity allocation between groups of shareholders. The equity allocation in a company varies, depending on the performance of the company and the rate of return that the private equity firm achieves. Performance ratchets are often used as a incentivisation tool for the managers in a buyout.

Stamp Duty Land Tax

/stamp/ /ˈdjuːti/ /land/ /taks/

Stamp duty land tax is chargeable on land transactions, which are acquisitions of chargeable interests, ie legal or equitable interests in land located in the England and Northern Ireland, for chargeable consideration. The equivalent tax in Scotland is ‘land and buildings transaction tax’ and in Wales is ‘land transaction tax’.
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