Reversing entry for previous years unfulfilled creditors due


D

Daytona

Small company accounts.

Last year I used an accountant who added his next years fees into the
amount due in one year. Since I'm doing the accounts myself this year,
how do I account for this ?
 
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P

PeterSaxton

Small company accounts.

Last year I used an accountant who added his next years fees into the
amount due in one year. Since I'm doing the accounts myself this year,
how do I account for this ?
Whatever the credit balance is: accruals or trade creditors you should
reverse it:

eg.

Dr Accruals
Cr Accountancy

or

Dr Trade creditors
Cr Accountancy
Cr VAT (if relevant)
 
R

Ronald Raygun

PeterSaxton said:
Whatever the credit balance is: accruals or trade creditors you should
reverse it:

eg.

Dr Accruals
Cr Accountancy

or

Dr Trade creditors
Cr Accountancy
Cr VAT (if relevant)
I suppose a more creative way to deal with it would be to Dr one
creditor and Cr another, that other being himself. Since he's doing
the work instead of his old accountant, his company may as well pay
him the fee! On the other hand, the company may not be able to
afford to pay the fee, and this might be the reason he's decided
to do it himself.

As an aside, is it really the norm to do it the way the old accountant
has done it? The general rule is that expenses (like everything else)
should be accounted for in the year to which they relate. In the case
of work done, this normally means the year during which the work is done.

In the case of accountancy work where the accountant is not involved
in the day to day bookkeeping, all the work of preparing the accounts
for year X is necessarily done during year X+1. Surely therefore,
even though the work itself relates to year X, the fee relates to
work done during year X+1. Therefore the fee relates to year X+1
and ought to be accounted for in year X+1, not in year X.
 
M

Martin

Ronald Raygun said:
I suppose a more creative way to deal with it would be to Dr one
creditor and Cr another, that other being himself. Since he's doing
the work instead of his old accountant, his company may as well pay
him the fee! On the other hand, the company may not be able to
afford to pay the fee, and this might be the reason he's decided
to do it himself.

As an aside, is it really the norm to do it the way the old accountant
has done it? The general rule is that expenses (like everything else)
should be accounted for in the year to which they relate. In the case
of work done, this normally means the year during which the work is done.

In the case of accountancy work where the accountant is not involved
in the day to day bookkeeping, all the work of preparing the accounts
for year X is necessarily done during year X+1. Surely therefore,
even though the work itself relates to year X, the fee relates to
work done during year X+1. Therefore the fee relates to year X+1
and ought to be accounted for in year X+1, not in year X.
No - that is not the case. Consider the mega-bucks audit fees for
MassiveCoy plc - they're charged to year X, being the year to which the
req't for audit etc relates. The income, on the other hand, is booked to
BigFour LLC in year X+1.

HTH
 
P

PeterSaxton

I suppose a more creative way to deal with it would be to Dr one
creditor and Cr another, that other being himself.  Since he's doing
the work instead of his old accountant, his company may as well pay
him the fee!  On the other hand, the company may not be able to
afford to pay the fee, and this might be the reason he's decided
to do it himself.
If he owns the company is there any advantage? Presumably if he is
paid a salary it's included in that. I don't think owner/directors are
usually paid based on individual items of work.
As an aside, is it really the norm to do it the way the old accountant
has done it?  The general rule is that expenses (like everything else)
should be accounted for in the year to which they relate.  In the case
of work done, this normally means the year during which the work is done.
The old accountant didn't know what he was doing.
In the case of accountancy work where the accountant is not involved
in the day to day bookkeeping, all the work of preparing the accounts
for year X is necessarily done during year X+1.  Surely therefore,
even though the work itself relates to year X, the fee relates to
work done during year X+1.  Therefore the fee relates to year X+1
and ought to be accounted for in year X+1, not in year X.
The fees relate to work required to produce the accounts in year X. If
a company only traded for one year would you still have a profit and
loss account with only accountancy fees in year 2 and normal
expenditure in year 1 except accountancy fees?
 
R

Ronald Raygun

PeterSaxton said:
If he owns the company is there any advantage?
From a tax perspective probably not, I was suggesting it merely as a
one-off method of avoiding ending up in the embarrassing position of
having a set of accounts showing a negative expenditure on accountancy
fees.
The old accountant didn't know what he was doing.
But you seem to be endorsing it below.
The fees relate to work required to produce the accounts in year X.
No, the fees relate to work required to produce the accounts *for*
year X, *in* year X+1.
If
a company only traded for one year would you still have a profit and
loss account with only accountancy fees in year 2 and normal
expenditure in year 1 except accountancy fees?
I don't see why not. It's fundamentally wrong to do it any other
way. But if it's standard practice to make an exception to the
general rule in the specific case of accountancy fees, then fair
enough, so be it.

If the accountant prices his services by the hour, it's a simple
matter to time himself in such a way that just before finalising
the accounts for year N, he knows how much time he will have spent
on the whole thing, and so he can insert the appropriate figure in
the expenses. Since this will be done long after year N's end date,
it would always have to go in as a creditor, since there is no way
he could have been paid before year-end, since at that time it
would not have been known how much work would be involved and thus
what the fee would be.

I'm now moved to suspect that the OP may have misunderstood what his
accountant did. The OP thinks his accountant put into year N's
accounts his fees for doing the accounts for year N+1 (which the OP is
proposing to do himself) whereas in fact he may only have done what
I've described in the last paragraph, i.e. put into year N's accounts
his fees for doing *during* year N+1 the accounts *for* year N. Does
that sound plausible?
 
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P

PeterSaxton

From a tax perspective probably not, I was suggesting it merely as a
one-off method of avoiding ending up in the embarrassing position of
having a set of accounts showing a negative expenditure on accountancy
fees.
If it's reality just show it.
But you seem to be endorsing it below.



No, the fees relate to work required to produce the accounts *for*
year X, *in* year X+1.
I've explained how it would look wrong given one years trading. It's
accepted that accountancy is accounted for this way.
I don't see why not.  It's fundamentally wrong to do it any other
way.  But if it's standard practice to make an exception to the
general rule in the specific case of accountancy fees, then fair
enough, so be it.

If the accountant prices his services by the hour, it's a simple
matter to time himself in such a way that just before finalising
the accounts for year N, he knows how much time he will have spent
on the whole thing, and so he can insert the appropriate figure in
the expenses.  Since this will be done long after year N's end date,
it would always have to go in as a creditor, since there is no way
he could have been paid before year-end, since at that time it
would not have been known how much work would be involved and thus
what the fee would be.
Accountancy is not always priced on a time basis.
I'm now moved to suspect that the OP may have misunderstood what his
accountant did.  The OP thinks his accountant put into year N's
accounts his fees for doing the accounts for year N+1 (which the OP is
proposing to do himself) whereas in fact he may only have done what
I've described in the last paragraph, i.e. put into year N's accounts
his fees for doing *during* year N+1 the accounts *for* year N.  Does
that sound plausible?
Well it does sound weird that an accountant would accrue for work on
2009 accounts work in 2008
 
R

Ronald Raygun

PeterSaxton said:
If it's reality just show it.
But it isn't reality that there has been negative expenditure in the
current year. Reality is that the previous year's accounts were (at
least allegedly - as I've suggested earlier, the OP may well have
misinterpreted the evidence) wrong because they show a positive
expenditure which never happened and never will, and this then forces
the current year's accounts, by way of correction, to show a negative
expenditure which never happened either. It's all a bit of a mess.
I've explained how it would look wrong given one years trading.
It only looks wrong to you because you're immersed in the
accepted way of doing it, and this blinds you to the fact that
strictly speaking the accepted way is wrong. Effectively it
involves making advance provision this year for expenditure you
expect to incur next year, based on nothing more than the work
in question being associated with data relating to this year.

Let's see if I can concoct an analogous example. Suppose your
client repaints his shop premises every year (that may seem too
often, but let's say it's a chip shop and so the walls get manky
rather quickly and it puts customers off). Do you account in
year 1 for his expected year 2 redecorating costs, on the grounds
that the redecorating work is required in order to put right the
damage (grime build-up) which happened during year 1, and that
therefore the work, although carried out in year 2, is really
"related" to year 1? No, I don't think so. I think you would
account for the expense exlusively in year 2, wouldn't you?

Alternatively, take the example of regular but less frequent
redecorating, say every three years. Do you account in years
N and N+1 for a third of the expected year N+2 decorator's
bill, on the grounds that you are making good wear and tear of
the past three years? Again, I expect you would not make such
annual provision but would account for the whole expenditure only
in year N+2 (and N+5 etc).
Accountancy is not always priced on a time basis.
I accept that it is sometimes done on a fixed price advance quotation
basis. Rather conveniently for the accountant, he would need to price
in an allowance for possible extra work needed to deal with unforeseen
problems, and when those problems don't arise, and the extra work is
not needed, he still collects the whole whack. You sneaky devils!
 
P

PeterSaxton

But it isn't reality that there has been negative expenditure in the
current year.  Reality is that the previous year's accounts were (at
least allegedly - as I've suggested earlier, the OP may well have
misinterpreted the evidence) wrong because they show a positive
expenditure which never happened and never will, and this then forces
the current year's accounts, by way of correction, to show a negative
expenditure which never happened either.  It's all a bit of a mess.
I accept that there hasn't really been negative expenditure in the
later year. The reason why showing negative expenditure is correct is
to ensure it isn't possible to simply not declare transactions and by
saying they were forgotten one year and then fail to put them in the
next by restating the previous years accounts.
It only looks wrong to you because you're immersed in the
accepted way of doing it, and this blinds you to the fact that
strictly speaking the accepted way is wrong.  Effectively it
involves making advance provision this year for expenditure you
expect to incur next year, based on nothing more than the work
in question being associated with data relating to this year.
I'm not blinded by it. I have thought about it and decided it is
correct. What if an interest payment is charged every 18 months?
Should you not accrue for it because the payment is in the next year?
No, part of the interest relates to the current year accounts and it
is the same with accountancy.
Let's see if I can concoct an analogous example.  Suppose your
client repaints his shop premises every year (that may seem too
often, but let's say it's a chip shop and so the walls get manky
rather quickly and it puts customers off).  Do you account in
year 1 for his expected year 2 redecorating costs, on the grounds
that the redecorating work is required in order to put right the
damage (grime build-up) which happened during year 1, and that
therefore the work, although carried out in year 2, is really
"related" to year 1?  No, I don't think so.  I think you would
account for the expense exlusively in year 2, wouldn't you?
The activity (grime) isn't an expense. The repairs are an expense so
they are accounted for in the second year.
Alternatively, take the example of regular but less frequent
redecorating, say every three years.  Do you account in years
N and N+1 for a third of the expected year N+2 decorator's
bill, on the grounds that you are making good wear and tear of
the past three years?  Again, I expect you would not make such
annual provision but would account for the whole expenditure only
in year N+2 (and N+5 etc).
My answer is the same as above.
I accept that it is sometimes done on a fixed price advance quotation
basis.  Rather conveniently for the accountant, he would need to price
in an allowance for possible extra work needed to deal with unforeseen
problems, and when those problems don't arise, and the extra work is
not needed, he still collects the whole whack.  You sneaky devils!
Sometimes the fixed price has no relation to time but only value.
 
R

Ronald Raygun

PeterSaxton said:
I'm not blinded by it. I have thought about it and decided it is
correct. What if an interest payment is charged every 18 months?
Should you not accrue for it because the payment is in the next year?
No, part of the interest relates to the current year accounts and it
is the same with accountancy.
Yes, I completely agree that you should accrue for interest and
charge 2/3 of it to year 1, and 1/3 of it (plus 1/3 of the next
tranche) to year 2. This is because interest is essentially rent
for loaned money, and the money was rented for a continuous period
which includes the whole of the first year and half the second.
Therefore the first year's accounts should include an expense for
part of the interest payment, even though the interest is neither
invoiced nor paid during that year.

But accountancy fees are not like rent or interest, they are
remuneration for work done.

If the accountant were providing an ongoing continuous service of
keeping the books up to date during the year in question, then I
would agree with you that it would make sense to accrue it. But
the scenario I have in mind is that the accountant not only does
nothing at all during year 1, but that the client hasn't even taken
steps to find an accountant until later, so that there existed no
accountant-client relationship in year 1. Then, after the end of
year 1, the client brings his newly-found accountant his shoe box
full of bank statements, purchase invoices, copies of sales invoices,
etc, and asks him to sort it all out.

The fees relate to the work and all the work is done in year 2. That
the work happens to involve dealing with "damage" (chaos) which arose
during year 1, ought to be just as irrelevant as the fact that the
decorator's work (in year 2) happens to involve dealing with "damage"
(wear and tear and grime) which arose during year 1.

You agree with me that the decorator's fee ought to be accounted
for in the year when the work was done, not in the year which made
the work necessary. Why should accountancy work differ in this
respect from every other kind of work?
 
P

PeterSaxton

Yes, I completely agree that you should accrue for interest and
charge 2/3 of it to year 1, and 1/3 of it (plus 1/3 of the next
tranche) to year 2.  This is because interest is essentially rent
for loaned money, and the money was rented for a continuous period
which includes the whole of the first year and half the second.
Therefore the first year's accounts should include an expense for
part of the interest payment, even though the interest is neither
invoiced nor paid during that year.

But accountancy fees are not like rent or interest, they are
remuneration for work done.

If the accountant were providing an ongoing continuous service of
keeping the books up to date during the year in question, then I
would agree with you that it would make sense to accrue it.  But
the scenario I have in mind is that the accountant not only does
nothing at all during year 1, but that the client hasn't even taken
steps to find an accountant until later, so that there existed no
accountant-client relationship in year 1.  Then, after the end of
year 1, the client brings his newly-found accountant his shoe box
full of bank statements, purchase invoices, copies of sales invoices,
etc, and asks him to sort it all out.

The fees relate to the work and all the work is done in year 2.  That
the work happens to involve dealing with "damage" (chaos) which arose
during year 1, ought to be just as irrelevant as the fact that the
decorator's work (in year 2) happens to involve dealing with "damage"
(wear and tear and grime) which arose during year 1.

You agree with me that the decorator's fee ought to be accounted
for in the year when the work was done, not in the year which made
the work necessary.  Why should accountancy work differ in this
respect from every other kind of work?
Because we know what year the work relates to.

Do you think that in the case of a business which traded for one year
only that two years accounts should be prepared? One year without any
accounting expenses and possibly a tax payment and a second year with
only accountancy expenses and a tax refund?
 
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R

Ronald Raygun

PeterSaxton said:
Because we know what year the work relates to.
You haven't satisfactorily explained how the way the accountancy work
relates to year 1 differs from the way other work (such as reinstating
the pre wear and tear status) relates to year 1.

In a way of course it looks better for the purpose of comparing like
with like year on year, especially in the case of work which is
recurrent and needs to be done every year. If you trade for 3 years,
you will have 3 lots of accounts to prepare, but you also have 3 lots
of redecorating to do. You will have rented your shop premises for
3 years, and agreed to vacate them in good condition, so you probably
have to stop frying a few days before the end of year 3 to get the
decorators in. It makes sense to show each of these three lots of
redecorating costs in each of the three sets of accounts, just as it
makes sense to show each of the three lots of accounting fees in each
of the three sets of accounts.

Now in the case of redecorating costs, if the lease is strict, you have
no choice but to do the 3rd decorating stint in year 3 (as late as
possible to lose as little trade as you dare, but you can't let it
spill over into year 4 because there may be new tenants waiting to
get in), and ideally you ought to schedule the first two stints towards
the ends of years 1 and 2, but if you happen to let one or both of them
slip into the beginning of the following year, then it would screw
up the like-for-like-ness of your accounts if you accounted for the
work when actually done instead of when it "really" relates to.

I see no fundametal difference between accountancy and redecorating.
If the nice comparability of adjacent year accounts is going to be
scuppered by reality, then why shouldn't accountancy fees follow
reality as well, and be charged to when the work is done?
Do you think that in the case of a business which traded for one year
only that two years accounts should be prepared? One year without any
accounting expenses and possibly a tax payment and a second year with
only accountancy expenses and a tax refund?
Yes, I do, because in the case of a business which really has traded
for one *whole* year, accountancy is unlikely to be the only loose end
which needs to be tied up after all trading has ceased, so although
year 2 will essentially be a non-trading year, there will be a number
of transactions happening in year 2 besides accountancy, like sorting
out creditors and debtors, dealing with the last few dribbles of bank
interest, liquidating the owner's/partners' capital account(s), or
dealing with final dividends and other winding up matters if it's a
limited company.

It might be different with a business which had traded for a few months
less than a whole year, where it may well be possible to wrap up
everything, including the accounting, during those remaining months,
i.e. sort everything out within the year.
 
P

PeterSaxton

You haven't satisfactorily explained how the way the accountancy work
relates to year 1 differs from the way other work (such as reinstating
the pre wear and tear status) relates to year 1.
Because the repairs work doesn't have to be done to prepare accounts.
In a way of course it looks better for the purpose of comparing like
with like year on year, especially in the case of work which is
recurrent and needs to be done every year.  If you trade for 3 years,
you will have 3 lots of accounts to prepare, but you also have 3 lots
of redecorating to do.  You will have rented your shop premises for
3 years, and agreed to vacate them in good condition, so you probably
have to stop frying a few days before the end of year 3 to get the
decorators in.  It makes sense to show each of these three lots of
redecorating costs in each of the three sets of accounts, just as it
makes sense to show each of the three lots of accounting fees in each
of the three sets of accounts.

Now in the case of redecorating costs, if the lease is strict, you have
no choice but to do the 3rd decorating stint in year 3 (as late as
possible to lose as little trade as you dare, but you can't let it
spill over into year 4 because there may be new tenants waiting to
get in), and ideally you ought to schedule the first two stints towards
the ends of years 1 and 2, but if you happen to let one or both of them
slip into the beginning of the following year, then it would screw
up the like-for-like-ness of your accounts if you accounted for the
work when actually done instead of when it "really" relates to.

I see no fundametal difference between accountancy and redecorating.
If the nice comparability of adjacent year accounts is going to be
scuppered by reality, then why shouldn't accountancy fees follow
reality as well, and be charged to when the work is done?
Redecorating is a decision of the owner(s). Accounting has to be done
for certain periods so it makes sense to allocate them to that period.
Yes, I do, because in the case of a business which really has traded
for one *whole* year, accountancy is unlikely to be the only loose end
which needs to be tied up after all trading has ceased, so although
year 2 will essentially be a non-trading year, there will be a number
of transactions happening in year 2 besides accountancy, like sorting
out creditors and debtors, dealing with the last few dribbles of bank
interest, liquidating the owner's/partners' capital account(s), or
dealing with final dividends and other winding up matters if it's a
limited company.

It might be different with a business which had traded for a few months
less than a whole year, where it may well be possible to wrap up
everything, including the accounting, during those remaining months,
i.e. sort everything out within the year.
But you still maintain that in a situation where everything other than
accountancy fees are dealt with in one period but the accounting work
is done in the next period then two years accounts should be prepared?
One to account for everything other than accounting and the other
simply to show the accounting expense (even though it's entirely
related to accounting for the first year) and claim a tax refund? This
will then mean that another years accounts will be needed ..... and we
go on ad finitum!
 
R

Ronald Raygun

PeterSaxton said:
Because the repairs work doesn't have to be done to prepare accounts.
Oh do please be serious. I'm not trying to be flippant here, or to
argue for argument's sake (to "be Tim"), but am genuinely trying to
understand why you take the position you do, and why it is established
practice to treat accountancy work differently from, it would seem,
*every other* kind of work, and to deviate in its case, and its case
only, from the normal rule that fees for work done should be charged
to the period in which the work is carried out, and not to the period
in which events took place which have made the work necessary.

Of course repairs work doesn't have to be done to prepare accounts,
accountancy work needs to be done for that, and repairs work has to
be done to, erm, well, do repairs.

The nature of accountancy work is to process and present information.
The information happens to relate to a certain year.

The nature of repairs work is to repair damage, and the damage will
have occurred in a certain year.

The two situations are exactly analogous in that there is only a
looseconnection between the fee involved and the year previous to
the one in which the work is done. Both cases differ in the same
way from other situations in which you would normally accrue, such as
rent, interest, or the consumption of continuously provided services.
Redecorating is a decision of the owner(s). Accounting has to be done
for certain periods so it makes sense to allocate them to that period.
It makes sense in both cases from a budgeting point of view, but it
doesn't make enough sense to carry this over into tax accounting for
one type of work and not the other.

I fully accept that if it's tradition and standard practice to do it
that way, then that's just the way it is, but you must admit that it
*is* an exception to the normal rule, and the reason why there is this
exception is pretty weak.
But you still maintain that in a situation where everything other than
accountancy fees are dealt with in one period but the accounting work
is done in the next period then two years accounts should be prepared?
Yes I do, but it's a very unlikely scenario, and so it shouldn't carry
much weight in terms of the wider picture.
One to account for everything other than accounting and the other
simply to show the accounting expense (even though it's entirely
related to accounting for the first year) and claim a tax refund? This
will then mean that another years accounts will be needed ..... and we
go on ad finitum!
Ha! You probably meant to write "ad infinitum", but in fact "ad finitum"
is right. You would only need to do it the once. You would prepare a
trivial set of accounts for year 2, and you would do it at the same time
as preparing the non-trivial accounts for year 1. The accounts for year 2
would contain the accountancy fees for preparing the year 1 accounts plus
a little bit added on for preparing the year 2 accounts. There would be
no need to wait until year 3 to prepare the year 2 accounts, in exactly
the same way as there would be no need to wait until year 2 to prepare
the year 1 accounts in the case of a business which had traded for a few
months less than a whole year, if those few months are enough time in
which to wrap everything up including preparation of the accounts.
 
P

PeterSaxton

Oh do please be serious.  I'm not trying to be flippant here, or to
argue for argument's sake (to "be Tim"), but am genuinely trying to
understand why you take the position you do, and why it is established
practice to treat accountancy work differently from, it would seem,
*every other* kind of work, and to deviate in its case, and its case
only, from the normal rule that fees for work done should be charged
to the period in which the work is carried out, and not to the period
in which events took place which have made the work necessary.

Of course repairs work doesn't have to be done to prepare accounts,
accountancy work needs to be done for that, and repairs work has to
be done to, erm, well, do repairs.

The nature of accountancy work is to process and present information.
The information happens to relate to a certain year.

The nature of repairs work is to repair damage, and the damage will
have occurred in a certain year.

The two situations are exactly analogous in that there is only a
looseconnection between the fee involved and the year previous to
the one in which the work is done.  Both cases differ in the same
way from other situations in which you would normally accrue, such as
rent, interest, or the consumption of continuously provided services.



It makes sense in both cases from a budgeting point of view, but it
doesn't make enough sense to carry this over into tax accounting for
one type of work and not the other.

I fully accept that if it's tradition and standard practice to do it
that way, then that's just the way it is, but you must admit that it
*is* an exception to the normal rule, and the reason why there is this
exception is pretty weak.





Yes I do, but it's a very unlikely scenario, and so it shouldn't carry
much weight in terms of the wider picture.


Ha!  You probably meant to write "ad infinitum", but in fact "ad finitum"
is right.  You would only need to do it the once.  You would prepare a
trivial set of accounts for year 2, and you would do it at the same time
as preparing the non-trivial accounts for year 1.  The accounts for year 2
would contain the accountancy fees for preparing the year 1 accounts plus
a little bit added on for preparing the year 2 accounts.  There would be
no need to wait until year 3 to prepare the year 2 accounts, in exactly
the same way as there would be no need to wait until year 2 to prepare
the year 1 accounts in the case of a business which had traded for a few
months less than a whole year, if those few months are enough time in
which to wrap everything up including preparation of the accounts.
I think I've given good enough reasons but how about this? You build a
structure in year 1 but realise that extra work is needed to make it
safe. This work can only be done in year 2. Do you accrue for this
work in year 1 or enter it in year 2 when the work is carried out.
Convention says accrue in year 1. Similarly with accountancy work. You
know it is needed but you can't do it until year 2 so you should
accrue for it. The reason that the accountancy fees are accrued is
that there is an obligation to do the work. Granted the owner could do
the work for free but that's as likely as the owner doing all the work
for free. The repairs may be wise to do but there's no obligation and
there's no reason to do it under the matching convention.


If you are still not clear I would recommend you read FRSSE, FRS12 and
the Companies Act.
 
S

Steven Sharp

In the case of accountancy work where the accountant is not involved
in the day to day bookkeeping, all the work of preparing the accounts
for year X is necessarily done during year X+1.  Surely therefore,
even though the work itself relates to year X, the fee relates to
work done during year X+1.  Therefore the fee relates to year X+1
and ought to be accounted for in year X+1, not in year X.
I actually agree. I spoke to an audit manager who agreed with me on
this one, that the technical answer to where to place the audit costs
for year ended 31st March 2005 (say) is in year ended 31st March 2006
because the audit will normally take place in May/June 2005.

FRS 5 would seem to support this. An entity, whilst legally obliged to
have an audit for year ended 31 Mar 05, does not have the work done,
nor therefore incur the liability until June 05, hence year ended 31
Mar 2006 would be the correct place to record the cost and liability.

Of course, no one does this, but instead accrues the audit fee in Mar
2005, mainly to get the CT benefit a year early. I'm surprised the
Revenue have never picked up on this, because it would be a huge
windfall to them to force British companies to disallow any audit/
accountancy accrual put into the accounts.
 
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P

PeterSaxton

I actually agree. I spoke to an audit manager who agreed with me on
this one, that the technical answer to where to place the audit costs
for year ended 31st March 2005 (say) is in year ended 31st March 2006
because the audit will normally take place in May/June 2005.

FRS 5 would seem to support this. An entity, whilst legally obliged to
have an audit for year ended 31 Mar 05, does not have the work done,
nor therefore incur the liability until June 05, hence year ended 31
Mar 2006 would be the correct place to record the cost and liability.
Where does FRS 5 seem to support this?

FRS 5 is trying to ensure that the accounting principle of substance
over form is used.
 
S

Steven Sharp

Where does FRS 5 seem to support this?

FRS 5 is trying to ensure that the accounting principle of substance
over form is used.
I don't want to get into a long discussion over this. FRS 5:

4 Liabilities:- An entity's obligations to transfer economic benefits
as a result of past transactions or events.

Personally, I believe that the date you should recognise the
accounting/audit fee is when the event of the audit occurs, and not
take it back into the previous accounting year. The benefit of the
audit is gained post year end, to match with the liability which
should therefore recognised post year end also.

I realise I am in the very much minority here, but I don't believe it
is incorrect to do what I state. Most counterarguments from colleagues
run along the lines of 'But that's what we did last year' (following
the old 'Why did the auditor cross the road?' joke) or state that the
company is legally obliged to have an audit or prepare statutory
accounts, which whilst true doesn't mean you should accrue it back
before the audit occurs (on that basis, I assume that it is perfectly
reasonable to accrue the 2009 to 2647 years car insurance liability
for the company fleet, because it is a legal liability to insure
vehicles).

I very much respect your opinion here Peter, I've lurked a long time
on this newsgroup but I do disagree on this point. It's a moot point
however. Most other accountants will take the view of accruing it
back. I do it, I acknowledge it, but I just disagree with it.

Thanks,

Steven
 
P

PeterSaxton

I don't want to get into a long discussion over this. FRS 5:
You don't have to get into a long discussion. FRS 5 is not about
straight forward accruing of expenditure. It's about much more complex
transactions.
4 Liabilities:- An entity's obligations to transfer economic benefits
as a result of past transactions or events.
As I've said the above is not relevant to accruing for accounting
fees.
Personally, I believe that the date you should recognise the
accounting/audit fee is when the event of the audit occurs, and not
take it back into the previous accounting year. The benefit of the
audit is gained post year end, to match with the liability which
should therefore recognised post year end also.
This is not what FRS 5 is about. The audit doesn't lead to an economic
benefit in the sense used in FRS 5. This is about how to account for a
series of link transactions.
I realise I am in the very much minority here, but I don't believe it
is incorrect to do what I state. Most counterarguments from colleagues
run along the lines of 'But that's what we did last year' (following
the old 'Why did the auditor cross the road?' joke) or state that the
company is legally obliged to have an audit or prepare statutory
accounts, which whilst true doesn't mean you should accrue it back
before the audit occurs (on that basis, I assume that it is perfectly
reasonable to accrue the 2009 to 2647 years car insurance liability
for the company fleet, because it is a legal liability to insure
vehicles).
I'm confused why you mentioned insurance in 2647. This is an example
of insurance relating to a future year. I am talking about, in your
example, an audit carried out in 2009 relating to 2008 accounts which
I have given reasons for why it should be accrued in 2008. I have not
for one moment suggested that if there is a legal liability to do
something then your should accrue all potential expenditure for
centuries in the future.
I very much respect your opinion here Peter, I've lurked a long time
on this newsgroup but I do disagree on this point. It's a moot point
however. Most other accountants will take the view of accruing it
back. I do it, I acknowledge it, but I just disagree with it.
I understand fully that you disagree with it. What you seem to be
saying is that because the work will be carried out in 2009 you don't
want to accrue for the 2008 audit.

What do you think of the following? A business takes out a lease on a
building and they perform alterations to the building. Under the terms
of the lease they are required to revert the building to the original
state at the end of the lease. When should the anticipated costs be
provided for. Accountants who use generally accepted accounting
principles would provide for them in the year that the alterations
were made. I suggest you are wrong if you say that you shouldn't
recognise the expenditure in the accounts until the work is actually
carried out.

I'm not saying I accrue because I am blinded (as Ronald suggests), I'm
not convinced because an "audit manager" makes a statement, I'm not
saying it because that's how most people do it. I am suggesting it
because I have thought about it and it makes sense. A simple "you
can't accrue for something because at the balance sheet date it hasn't
happened" is not correct. This would ignore generally accepted
accounting principles.

Provisions and accruals can be blurred. Accruals are for goods and
services that have been supplied but provisions are liabilities of
uncertain timing or amount. Accountancy fees would actually be classed
as provisions but that would have the same practical effect as
accruals.

A provision must be recognised in the accounts when all three of the
following criteria are met:

1. there's a present obligation as a result of a past event - if you
have transactions they have to be accounted for,
2. it is probable that a transfer of economic benefits will be
required - the accountants will have to be paid, and
3. a reliable estimate can be made of the amount of the obligation -
look at previous years or similar clients.

I therefore think that accountancy fees should be accrued and most
accountants and all HMRC inspectors seem to agree.

I hope I have cleared up any confusion.
 
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R

Ronald Raygun

PeterSaxton said:
Provisions and accruals can be blurred. Accruals are for goods and
services that have been supplied but provisions are liabilities of
uncertain timing or amount. Accountancy fees would actually be classed
as provisions but that would have the same practical effect as
accruals.

A provision must be recognised in the accounts when all three of the
following criteria are met:

1. there's a present obligation as a result of a past event - if you
have transactions they have to be accounted for,
2. it is probable that a transfer of economic benefits will be
required - the accountants will have to be paid, and
3. a reliable estimate can be made of the amount of the obligation -
look at previous years or similar clients.
It must be more complicated than that. Does not the interest on a
loan, scheduled to be repaid after 3 years, fit those criteria, and
should it not therefore be provided for in the year the loan was taken
out, as opposed to spread over the 3 or 4 sets of annual accounts?
 

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