Re: Reversing entry for previous years unfulfilled creditors due

On 13 Jan, 20:25, Steven Sharp <stevenlsh...@xxxxxxxxxxxxxx> wrote:
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:

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 *** 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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