Law firms could face cash-flow problems unless the Accounting Standards Board (ASB) clarifies as a matter of urgency the impact of new accounting rules, the Law Society has warned.

Responding to the board's draft guidance on Application Note G to Financial Reporting Standard 5, the Society said the issue was 'of fundamental importance to the profession'.


The standard will change the way revenue is shown in accounts and will mean that firms will have to include the projected profits of equity partners in their work-in-progress calculations, rather than once a matter is billed, as at present.


This could lead to a one-off tax hit on firms.


The Society called on the ASB's urgent issues task force to clarify various issues, such as how different types of contracts of services would be treated, for example one with distinguishable phases and one without.


The Society added that 'it would provide considerable reassurance' for solicitors who rely substantially on conditional fee agreements if it was clearly stated that such arrangements fall outside the ambit of the application note.



The task force has been criticised for failing to say definitively when its guidance will be applied from (see [2004] Gazette, 9 December, 1). Application Note G, which was published in November 2003, stated that the new rules should apply to accounting periods on or after 31 December 2003.



Society President Edward Nally said: 'It is disappointing that law firms are faced with finalising their accounts and calculating their tax payment (expected on 31 January) at a time when the accounting procedures for work in progress remain ambiguous.'


Calling on the task force to finalise its guidance as a matter of urgency, he added: 'Once the accounting position has been resolved, we can begin an analysis of the true financial impact on firms. There is a worry that some firms could face cash-flow problems as they must pay tax on income not yet received from clients.'


Meanwhile, accountancy firm Smith & Williamson called on the ASB to provide examples of how the new rules will operate.


Jeremy Boadle, a Smith & Williamson director, said: 'Many professional practices operate as partnerships which are not required to produce audited "true and fair" accounts but are required to prepare accounts on this basis for the purposes of taxation. As such, they are often less familiar with the principles underlying accounting standards and interpretation of accounting terminology.'


He warned that, without clear examples, there could be confusion leading to firms adopting divergent policies.