Disbursements are an everyday feature of professional services firms, yet their accounting treatment is often subject to different interpretations. In this context, disbursements are business expenses paid to third parties on behalf of a client, such as court fees, expert witness reports, registry filings or translation services.
While they have traditionally been viewed as straightforward pass-through costs, the latest iterations of FRS 102 under UK GAAP require a far more nuanced, judgement‑based approach. In practice, firms are interpreting the guidance in different ways, depending on how they read the standards and assess the substance of each arrangement. As a result, there is no single, uniform treatment and we’re seeing considerable variation in the approach taken across firms.
Driven by differing interpretations of accounting principles and client arrangements. The revised standard now requires those approaches to be revisited and clearly justified as part of the audit process
UK GAAP and FRS 102 in professional services
The role of UK GAAP
UK GAAP provides the overarching framework for financial reporting in the UK. Within that framework, FRS 102 sets out the recognition and measurement requirements that most professional services firms apply in practice. Recent updates have brought FRS 102 into closer alignment with IFRS 15, particularly in relation to revenue recognition and the treatment of costs incurred on behalf of clients.
FRS 102 principles relevant to disbursements
The key accounting principle introduced by these changes is the need to assess whether a firm is acting as a principal or an agent when incurring costs. This assessment determines whether disbursements are excluded from revenue as reimbursements or included within turnover on a gross basis, with related costs treated as expenses. The focus is no longer simply on what the cost relates to, but on whether the firm controls the underlying service.
Disbursements in Professional Services
Business expenses versus disbursements
Not all business expenses are disbursements. Disbursements are typically costs paid on a client’s behalf, where the client is the ultimate beneficiary. Other costs, such as travel, subsistence or internal support costs, are more accurately described as indirect costs of delivering a professional service.
Drawing a clear distinction between these categories is critical for consistent expense reporting and compliant financial statements.
Common disbursements in practice
In professional services firms, disbursements often include:
- Court filing and statutory fees
- Land or company registry charges
- Expert and consultant reports
- Translation and transcription services
- Courier and delivery costs related to client matters
Each category must now be assessed individually under FRS 102, rather than applying a single blanket treatment.
Treatment of Disbursements under FRS 102
Accounting principles for recognising disbursements
Under FRS 102, the accounting treatment hinges on whether the firm controls the third‑party good or service before it is transferred to the client.
Agent treatment: The firm acts as an intermediary only. Costs are treated as reimbursements, recoverable amounts are shown as receivables, and non‑recoverable amounts are expensed. These disbursements are excluded from revenue.
Principal treatment: The firm controls the service and provides it as part of its overall deliverable. Revenue and expenses are recognised gross, and unbilled amounts are included within contract assets (previously referred to as work in progress).
Expert witness fees, specialist opinions and translation services are common examples where this assessment is particularly judgemental.
Indirect costs and disbursements
Indirect costs associated with service delivery, such as travel expenses or outsourced support controlled by the firm, are often misclassified as disbursements. In many cases, these are more appropriately treated as principal costs and included within revenue. Clear policies help ensure consistency and reduce the risk of misstatement.
Tax Implications of Disbursements
Expense reporting and tax deductibility
The way disbursements are treated for accounting purposes can also have tax implications. While accounting and tax rules are not identical, inconsistent expense reporting may affect VAT treatment, tax deductibility and the presentation of income. Firms should ensure their accounting policies align with tax regulations and are applied consistently across matters.
Compliance and best practice
A well‑documented approach to disbursements supports both financial reporting compliance and tax governance. It also helps firms respond confidently to audit queries and regulatory review.
Best Practices for Expense Reporting
Effective treatment of disbursements starts with good process. Leading firms are:
- Clearly defining disbursements versus indirect business expenses
- Applying agent versus principal assessments by cost category
- Documenting judgements within financial statement accounting policies
- Using technology to track, categorise and review disbursements consistently
Given that this remains a grey area under current financial reporting standards, documentation and consistency are just as important as the conclusion reached.
Conclusion
The revised FRS 102 requirements have raised the bar for how professional services firms treat disbursements under UK GAAP. There’s no single correct answer in every case, but firms are expected to apply accounting principles thoughtfully, assess control carefully and clearly explain their approach. With properly defined policies and robust expense reporting processes, firms can achieve both compliance and efficiency while reducing the risk of challenge.
If you’d like to discuss how the revised FRS 102 could affect the treatment of disbursements in your firm or would value a sounding board on agent versus principal judgements, please get in touch today. We’d be happy to talk through your specific circumstances and help you reach a clear, well‑documented and proportionate approach.
