B2.619 Income recognition in respect of WIP—changes in accounting policy
For the purposes of income tax and corporation tax1, the profits of a trade (or for income tax only, a profession or vocation) are computed on the basis of generally accepted accounting practice, subject to any necessary adjustments required by tax law2, unless the profits are calculated on the cash basis (see B2.112).
The treatment for valuing work in progress of a professional firm (ie the stock of a professional firm), was previously covered by SSAP 9 prior to its withdrawal. SSAP 9 provided that it should be valued at the lower of cost (ie the direct costs of fee earners engaged on that work together with any attributable overheads) or net realisable value (see B2.611, B2.618).
However, after the Accounting Standards Board (ASB) issued Application Note G (AN G) to Financial Reporting Standard (FRS) 5 (Reporting the substance of transactions), effective from 23 December 2003, there was much debate about the application of SSAP 9 to work in progress by professional firms. The key issue was whether such firms should include work in progress in their closing balance sheet at the full selling price, rather than the lower of cost or net realisable value. Note that FRS 5 Application Note G and UITF 40 (see below) have been replaced by FRS 102 s 23, Revenue. The principles underlying FRS 102 are comparable to those present in both FRS Application Note G and UITF 403.
Neither the ASB, the ICAEW nor