Hello!
I have a general question I was hoping to get an answer/advice on.
If a company has old accruals stored on the balance sheet is it ok to release them into the P&L without providing any disclosure in the notes to the accounts?
They obviously need to be released at some stage if bills aren't received for them but if it inflates profit by a considerable margin then what is the accounting protocol?
Thanks
Hi Oliver
Generally if you have accruals sat there without any justification I would say to release them. If you cant provide evidence to audit I would release the entry, either in the next accounting period and certainly within that financial year.
I would probably be able to say to audit that no cost ever arisen for the accrual rather than holding indefinately for a rainy day.
It's hardly unusual to have accruals that with hindsight turn out to be unsustainable; people accrue for an invoice at year-end thinking it'll be posted into the new year but it's actually paid in the same year as the accrual's made, amounts accrued turn out to be different from amounts finally invoiced, and so on. That's just a normal part of business.
But if the amounts are material and do adjust profit "by a considerable margin" then there are other considerations. Presumably taxable profit was reduced in the year of the accrual? And were those profit figures used to support funding applications or maintain lending criteria? Material unjustified accruals may have been simple mistakes, but they may have been something much less innocent.
You have two problems here. One is that if you have accruals on the balance-sheet that you can't sustain, you've no choice but to write them back whether they're material or not, and if the effect on profit is material then you need to talk to your auditors about a disclosure they'll accept. The other is that you need to investigate how those accruals got onto the balance-sheet in the first place.
Hi
Thanks for the replies.
The accruals are genuine - it's a matter of discretion as to whether to release them or not to a degree. I think they should be.
The issue is more whether or not it needs to be disclosed which I think they do. The fraudulent aspect is that they are inflating profit. The argument against would be that in the period when the accruals were made, profit was 'innocently' understated so is there a right to 'correct' that and not disclose it when releasing them to the P&L. My view is no - it needs to be disclosed and what happened previously by understating the profit is irrelevant now.
Oliver, may I suggest that it's always worth being careful with terminology.
If those accruals were in error, or have become invalid, then that's just part of business and you simply put them right. (Although I'd argue that the 'disclosure' element is driven by materiality, not 'innocence'.)
But you're using the term "fraudulent". Here in the UK the Fraud Act 2006 has created a general offence of "fraud" which carries a penalty of up to 10 years' imprisonment. The Act defines fraud as when someone acts dishonestly with the intention "to make a gain, or cause a loss or the risk of a loss to another". Company officers and the company itself can be charged. And "it is immaterial whether or not [the Defendant] is successful in his enterprise and whether or not any gain or loss is actually made". (Quotes from the CPS guidance.)
So if you believe (or have reason to believe) that those accruals really were dishonest and so "fraudulent" then you have to take legal advice. But if they were genuine, your wording is likely to do serious damage to your auditor's blood-pressure!
Hi Oliver
Don't forget there is a whole section of the CIMA website dedicated to ethics, including an area on Ethics Support at http://www.cimaglobal.com/Professional-ethics/Support-lines-and-legal-advice/
Razia
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