Law firms wrestling with changes to UK accounting standards need to be fair to both new hires and departing principals in the way the introduction is handled. The issue applies particularly to firms that operate as LLPs or limited companies.
Ross Prince, a partner and professional practices specialist at the Midlands office of national audit, tax and advisory firm Crowe Clark Whitehill, said it was important to understand the changes to ensure everyone is treated equitably.
Mr Prince, who has a particular specialism in advising law firms, was commenting on the arrival of FRS 102.
Warning that action is required now, he cautioned: “These are potentially significant changes.
“For March and April year ends, the year of adoption is 2016, but the transition mechanism means that a firm’s 2016 financial year could potentially include adjustments to profit in respect of the previous two financial years. This is because comparative figures will need to be restated and makes the transition date for the opening position the 2014 year end.”
This is important, as most law firms will agree partners’ remuneration and profit shares based on current accounting standards, yet the partners present in the 2016 financial year will have their remuneration based on the new standards which include any adjustments from the transition date.
“For law firms that have partners joining or leaving between 2014 and 2016, there is the extra consideration of how to ensure that any changes to the balance sheet and reported profits on transition are equitable amongst all partners.
FRS 102 is much closer to International Financial Reporting Standards.
Key changes include the treatment of goodwill, rent free periods, holiday pay and gains and losses on investment properties.
“Any firms who have not got to grips with this need to get their act together quickly given that they have missed the effective deadline already,” said Mr Prince.
“They should seek good advice as a matter of urgency.”