Work in progress (WIP) and debtors should not be accepted at their ledger balances when buying an accounting firm. WIP may include time that cannot yet be billed, is outside scope, needs rework or will require substantial effort to complete. Debtors may include disputed, stale, related-party or already impaired invoices.

Review both balances job by job and client by client. Establish what work was performed, the right to bill or collect, the remaining completion cost and the post-balance-date cash outcome. Then make the sale agreement explicit about which balances transfer, who completes unfinished work, who bears write-offs and how receipts are allocated around completion.

Start by separating unlike balances

Ask the seller to map every item described as WIP or debtors into a consistent set of categories:

  • Unbilled time or disbursements: activity recorded against a job but not yet invoiced.
  • Recognised contract asset or unbilled revenue: value recognised for services already transferred where the right to payment remains conditional.
  • Trade debtor: an invoice for which the right to consideration is unconditional apart from the passage of time.
  • Prepayment or contract liability: money billed or received before the related service is delivered.
  • Non-recoverable activity: write-offs, inefficiency, training, duplicated work, rework or out-of-scope effort with no supported billing path.

These labels are not interchangeable. AASB 15 distinguishes a contract asset from a receivable and requires sufficient information to distinguish them where alternative descriptions are used (AASB). That distinction is a useful diligence discipline, although the seller’s applicable accounting framework and policies must be confirmed rather than assumed.

Build one job-to-cash schedule

Request a de-identified export at job and client-group level, with opening WIP, time and disbursement entries, write-ups and write-downs, invoices, credit notes, receipts and closing WIP and debtors. Include job status, service line, responsible partner, staff grade, last activity date, expected completion date and next client deliverable.

Reconcile the schedule to the practice-management system, general ledger, aged receivables, management accounts, bank receipts, BAS and financial statements. Australian Government guidance tells buyers to independently check three to five years of financial information, including receivables, BAS, profit and loss, cash flow and sales records (business.gov.au). A schedule that does not bridge to those records is not yet reliable evidence.

Use anonymous identifiers during initial diligence. The OAIC says vendors should consider de-identification and avoid giving prospective buyers customer names or identifiers where possible; it also recommends controlled access where personal information must be provided (OAIC). Lawyers should settle confidentiality, data-room and later disclosure arrangements.

Test whether WIP is genuinely billable

For each material job or sample, answer four questions.

1. Does the work exist?

Trace recorded time to staff, dates, task descriptions, source documents and deliverables. Look for late timesheet entries, round-hour postings, dormant jobs and unusual spikes before the sale process. Compare hours with payroll and capacity; recorded activity that exceeds plausible available time needs explanation.

2. Is there a supported right to bill?

Read the current engagement terms, variations and client communications. APES 305 requires members in public practice to document and communicate engagement terms; its guidance covers scope, responsibilities, fee calculation and agreed billing schedules (APESB). Time recorded beyond a fixed fee, cap or agreed scope is not automatically recoverable merely because the system values it at standard rates.

3. What remains to finish the job?

Estimate remaining preparation, review, partner sign-off, client queries and lodgement work. A partly completed job can carry a positive WIP balance while its remaining cost exceeds the amount still billable. Identify quality issues, missing client information and deadlines that may shift completion risk to the buyer.

4. What has the practice historically converted to invoices and cash?

Compare WIP ageing with later billings, credit notes, write-offs and receipts across several complete service cycles. Analyse conversion by service line, partner, fee model and age band. A recurring pattern of old WIP cleared through write-downs is different from recent work awaiting a normal milestone.

Test debtor collectability with subsequent evidence

Obtain an aged debtor listing at several historical month-ends, not only the selected completion date. For material or sampled invoices, match the invoice to engagement scope and completed work, then trace collection after the reporting date to the bank. Flag:

  • balances repeatedly rolled forward or paid only after reminders;
  • disputes, complaints, fee concessions and credit notes raised after period end;
  • invoices to former, insolvent, related-party or non-contactable clients;
  • credits or receipts applied to the wrong client or invoice;
  • debtor concentration by client group and relationship partner; and
  • collection delays that worsen around annual or lodgement peaks.

Do not apply one mechanical percentage to every age band. Consider the client relationship, dispute status, payment history, subsequent receipts and recovery cost. The ATO’s GSTR 2000/2 explains that GST bad-debt adjustments can depend on matters including whether an amount has been written off or overdue for 12 months, and that the provisions differ for entities accounting on a cash basis (ATO). Tax treatment is not proof of commercial collectability; obtain transaction-specific tax advice.

Define the completion cut-off and ownership

The buyer and advisers should turn the analysis into clear transaction mechanics. Questions include:

  1. Are WIP and debtors included in the assets acquired, retained by the seller or dealt with through an adjustment?
  2. Who invoices pre-completion work completed after settlement, and on what evidence?
  3. Who performs and funds the remaining work needed to make inherited WIP billable?
  4. Who collects seller-retained debtors, and can collection activity damage transferred client relationships?
  5. How are mixed receipts, credit notes, refunds, GST and recovery costs allocated?
  6. Is there a true-up, escrow, holdback or price-retention mechanism, and who decides disputes?

Avoid double counting. If maintainable earnings already include revenue recognised from WIP, adding the same gross WIP balance to price may count value twice. Conversely, excluding WIP while requiring the buyer to finish substantial pre-completion work can transfer cost without compensation. The appropriate treatment depends on transaction structure, accounting policies, tax and the legal rights being acquired.

Red flags and decision responses

Pause for further work where there are unreconciled control accounts, missing time records, large manual journals, old WIP with no recent activity, repeated post-period credits, unusually low write-offs or no evidence of subsequent receipts. Also investigate sharp changes in billing just before sale and inconsistencies between partner explanations and job files.

Classify each finding as a data gap, valuation assumption, completion adjustment, contractual protection, transition task or reason not to proceed. Legal, accounting, tax and valuation advisers should review the cut-off, asset ownership, revenue recognition, GST, debt assignment, client communications and enforceability of collection arrangements.

Frequently asked questions

Is all recorded time an asset?

No. A time entry proves that activity was recorded, not that the work was authorised, transferred to the client, billable or collectible. Test scope, progress, remaining cost and historical conversion.

Should the buyer acquire the seller’s debtors?

There is no universal answer. Compare collectability, price, tax, administration and client-relationship effects with a seller-retained collection arrangement. Record the chosen allocation precisely in the transaction documents.

When should the schedules be refreshed?

Refresh WIP, debtors, subsequent receipts and credit notes close to signing and again at the agreed completion cut-off. Fast-moving balances can make an earlier diligence snapshot obsolete.

Sources

Disclaimer

This article provides general information only. It does not constitute legal, tax, accounting, financial, credit, valuation or other professional advice. Circumstances differ. Obtain advice from appropriately qualified advisers before acting or entering a transaction.