Canada Reversal of accrued expense

[M_s2022]

Hi everyone,

I have made an accrual of expense at year-end, while the expense was recorded. The year has closed, but if I'm unable to ask for re-opening to reverse the accrual, what would be an alternative acceptable treatment? since reversing in the new year will reduce expenses and increase revenue, which would be concerning audit wise. The amount is material- Please reply to me urgently.

 

[kirby]

Relax. You got this.
Happens all the time.
Auditors will only be concerned if you accrued an expense that will never happen.

Let's go in slow-motion: Given a Sept 30, year -end. Assume in Sept 30 2021, you accrue $1 MM in expense for an invoice due Oct 31, 2021. So at year end Sept 2021, you have a $1MM payable on your books and a $1MM expense.
Now in next fiscal year, on Oct 31,2021 your AP folks pay the $1MM invoice and debit expense for $1 MM. So at this time you make the adjustment: Dr AP and credit expense for $1 MM. In other words, leave the accrual alone until it is time to reverse it. Result in fiscal 2022 is no net expense.
But sounds like your company likes to reverse all accruals immediately the next period. OK but then if you have not paid the invoice you need to again accrue the expense.
Got it?

 

[M_s2022]

Thank you Kirby. The issue is that both the actual expense and the accrual were recorded in the last fiscal which would result in duplicate expenses with decrease in revenue in last fiscal and the inverse in this year, since the invoice was already paid, but mistakenly accrued for again in previous fiscal.

 

[kirby]

OK, got it.
Given that the expense was material, then you need to re open the closed year and fix.
If Sr Mgmt doesn’t want to do so, then audit team will likely find it and may require a fix in prior year anyway.
If not fixed in prior year, then yes, when accrual is fixed in current year, expense will get a credit entry in current year.
And if not fixed and after audited financials for prior year are issued, only “fix” at that point requires a prior period adjustment, kind of a big deal. Tells the world mgmt and auditors missed something in prior year.
Fix prior year now if you can.