NEW RULES AFFECTING SOLICITOR LLPS

The revised FRS102 Section 1a accounting framework introduces a prescriptive five-step model that affects fixed fees, hourly work, retainers, contingent fees, disbursements, and bundled legal services. It is not merely technical: it impacts WIP management, billing profiles, and financial reporting. The key change is that unbilled work should no longer be viewed simply through the lens of time recorded and bills raised. Instead, firms will need to assess whether the work performed creates a right to consideration under the contract and whether revenue should be recognised as performance obligations are satisfied.

Step 1: Identify the Contract with the Client

Revenue should only be recognised once there is a clear agreement with the client. That agreement must create enforceable rights and obligations, set out identifiable payment terms, and make collection of the fee probable.

• Engagement letters should clearly set out the scope of work, key deliverables, fee basis, and payment terms.
• Informal or implied approvals, such as repeat instructions from regular conveyancing clients, may still support the existence of a contract, but unclear arrangements increase audit risk.

Step 2: Identify the Performance Obligations

A performance obligation is a distinct legal service promised to the client. This step is important for solicitor firms because a single engagement may include several connected services, which must be assessed to determine whether they are separate obligations or part of one combined service.

• Conveyancing: searches, enquiries, exchange, and completion may need to be considered together to decide whether they form distinct services or one overall conveyancing service.
• Litigation: drafting, disclosure, hearings, and case management are often highly interdependent and may therefore represent one performance obligation.
• Retainers: firms should distinguish between general advisory access and specific deliverables promised under the retainer arrangement.

Why this matters: identifying the correct number of performance obligations determines how the fee is allocated and when revenue can be recognised.

Step 3: Determine the Transaction Price

The transaction price is the amount the firm expects to be entitled to for the services provided. It should reflect any success fees, discounts, refunds, fee caps, or expected write-downs.

• Contingent fees: estimate the expected fee and apply an appropriate constraint so revenue is only recognised when it is highly probable that it will not later reverse.
• Hourly work: assess expected recoverability, as anticipated write-downs reduce the transaction price.
• Retainers: consider whether non-refundable upfront fees relate to future services, in which case recognition may need to be deferred.

Step 4: Allocate the Price to Performance

Where a matter includes more than one distinct performance obligation, the firm must allocate the total fee between those obligations based on their stand-alone selling prices. This ensures revenue reflects the services delivered, rather than simply the timing of billing.

• Corporate retainers: if a retainer includes unlimited advisory calls and a separate annual training session, part of the fee may need to be allocated to each service.
• Probate matters: if legal advice and estate administration are priced together, the firm should assess whether they are separate obligations requiring allocation.

Step 5: Recognise Revenue as Obligations Are Satisfied

Revenue is recognised as services pass to the client, either progressively as work is carried out or when a defined service or deliverable is completed.

Fixed-fee conveyancing is generally recognised over time as meaningful legal work is performed. Hourly work is recognised over time as recoverable work is carried out. Retainers are typically recognised over the retainer period, unless specific deliverables require recognition at a point in time. Contingent fees are recognised only when the success event has occurred and it is highly probable the revenue will not reverse.

Review revenue streams

• Map each revenue stream to the five-step model, including fixed fees, hourly work, retainers, contingent fees, disbursements, and bundled services.
• Identify areas requiring judgement, including variable consideration, contract modifications, and matters with multiple performance obligations.

Strengthen documentation and systems

• Update engagement letters, retainer templates, and fee proposals so the scope of work, deliverables, fee basis, and payment terms are clearly documented.
• Ensure WIP, billing, and deliverables can be tracked at performance obligation level, with clear audit trails for key judgements.

Plan the transition approach

• Decide whether to apply the changes retrospectively or use a cumulative catch-up approach.
• Document the chosen method, supporting rationale, and expected impact on opening balances, comparatives, and profit recognition.

The revised revenue recognition rules will affect more than year-end reporting. Partners, practise managers and COFAs should focus on the areas most likely to influence profitability, audit evidence, and compliance readiness.

• changes in revenue timing may affect profit allocation, WIP ageing, lock-up, and cashflow forecasting.
• the more prescriptive requirements mean firms will need clearer evidence for key judgements, especially around contract balances and when performance obligations are satisfied.
• early preparation will reduce implementation risk, support smoother audits, and help avoid unexpected year-end adjustments.

For solicitor firms, year-end WIP reviews are likely to require greater judgement. Some balances may remain as WIP, while others may need to be recognised as revenue with a related contract asset. Amounts billed in advance may also need to be deferred as contract liabilities where the relevant services have not yet been delivered. In practice, the revised rules place greater emphasis on clear engagement terms, recoverability assessments, matter-level reviews, and supporting audit evidence.

Firms should not assume existing year-end WIP treatment will continue unchanged. A clear policy will be needed to determine whether unbilled work is WIP, accrued revenue or a contract asset, or deferred income.

If you would like to discuss how these changes may affect your firm, or need support with implementation, please contact a member of our specialist solicitor team.