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Pre-paid items |
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Balance sheet presentation |
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Cash outflow |
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Expense |
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Accrued assets: Pre-paid expenses |
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Cash inflow |
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Revenue |
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Accrued liabilities: Deferred revenue |
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Accrued items |
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Balance sheet presentation |
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Revenue (other) |
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Cash inflow |
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Accrued assets: Accrued revenue |
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Expense (other) |
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Cash outflow |
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Accrued liabilities: Accrued expenses |
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Revenue should be recognized with the debit to accounts receivable or contract assets. In contrast, "other" revenue (revenue associated with peripheral or incidental transactions) should be recognized with the debit to accrued revenue. Also see the accounting elements page for a more detailed discussion on how to distinguish revenue, other revenue and gains. Expenses should be recognized with the credit to accounts payable. In contrast, "other" expenses (expenses associated with peripheral or incidental transactions) should be recognized with the credit to accrued expenses. Also see the accounting elements page for a more detailed discussion on how to distinguish expenses, other expenses and losses. |
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Revenue should be recognized with a debit to accounts receivable or contract assets.
In contrast, "other" revenue (revenue associated with peripheral or incidental transactions) should be recognized with a debit accrued revenue.
Also see the accounting elements page for a more detailed discussion on how to distinguish revenue, other revenue and gains.
Expenses should be recognized with a debit to accounts payable.
In contrast, "other" expenses (expenses associated with peripheral or incidental transactions) should be recognized with a debit accrued expenses.
Also see the accounting elements page for a more detailed discussion on how to distinguish expenses, other expenses and losses.
Pre-paid expense, deferred revenue
1/1/X1 XYZ rented a truck from ABC for 6 months paying 120,000 in advance.
As the period was for one year, XYZ applied the recognition exemption outlined in IFRS 16.5.a | US GAAP ASC 842-20-25-2 and did not capitalize a ROU asset and associated liability.
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XYZ: 1/1/X1 | 1.1.X1 |
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Accrued assets: Pre-paid rent |
120,000 |
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Cash |
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120,000 |
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ABC: 1/1/X1 | 1.1.X1 |
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Cash |
120,000 |
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Liabilities: Deferred (unearned) revenue: Rent |
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120,000 |
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XYZ: 3/31/X1 | 31.3.X1 |
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Expense: Distribution: Vehicle rent |
60,000 |
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60,000 |
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ABC: 3/31/X1 | 31.3.X1 |
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Liabilities: Deferred (unearned) revenue: Rent |
60,000 |
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Rental revenue |
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60,000 |
Accrued revenue, accrued expenses
1/1/X1 XYZ lent ABC 120,000 in that ABC would repay 126,000 6/30/X1.
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XYZ: 1/1/X1 | 1.1.X1 |
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Loans receivable |
120,000 |
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Cash |
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120,000 |
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ABC: 1/1/X1 | 1.1.X1 |
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Cash |
120,000 |
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Loans payable |
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120,000 |
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XYZ: 3/31/X1 | 31.3.X1 |
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Accrued assets: Accrued Interest revenue |
3,000 |
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Other revenue: Interest |
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3,000 |
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ABC: 3/31/X1 | 31.3.X1 |
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Other expenses: Interest |
3,000 |
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Accrued Liabilities: Accrued Interest expense |
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3,000 |
Accruals (estimated items)
At the end of X0, XYZ estimated that 10,000 worth of electricity had been consumed in storefronts in Q4.X0. The actual amount, per the invoice it received on 1/15/X1, was 11,000. XYZ paid the invoice on 1/31/X1.
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12/31/X0 | 31.12.X0 |
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Distribution (selling expense): Electricity |
10,000 |
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Accounts payable: Electricity |
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10,000 |
Adjustment 12/31/X0 | 31.12.X0, recorded 1/15/X1 | 15.1.X1
AU Section 560.03 (link: pcaobus.org) states: The first type [of subsequent events] consists of those events that provide additional evidence with respect to conditions that existed at the date of the balance sheet and affect the estimates inherent in the process of preparing financial statements. All information that becomes available prior to the issuance of the financial statements should be used by management in its evaluation of the conditions on which the estimates were based. The financial statements should be adjusted for any changes in estimates resulting from the use of such evidence.
While IAS 10 does not explicitly state "financial statements should be adjusted for any changes in estimates" like AU 560.03, the examples IAS 10.9 provides indicate that this is its intent.
IAS 10.9: The following are examples of adjusting events after the reporting period that require an entity to adjust the amounts recognised in its financial statements, or to recognise items that were not previously recognised:
(a) the settlement after the reporting period of a court case that confirms that the entity had a present obligation at the end of the reporting period. The entity adjusts any previously recognised provision related to this court case in accordance with and Contingent Assets or recognises a new provision. The entity does not merely disclose a contingent liability because the settlement provides additional evidence that would be considered in accordance with paragraph 16 of IAS 37.
(b) the receipt of information after the reporting period indicating that an asset was impaired at the end of the reporting period, or that the amount of a previously recognised impairment loss for that asset needs to be adjusted. For example:
(i) the bankruptcy of a customer that occurs after the reporting period usually confirms that the customer was credit-impaired at the end of the reporting period;
(ii) the sale of inventories after the reporting period may give evidence about their net realisable value at the end of the reporting period.
(c) the determination after the reporting period of the cost of assets purchased, or the proceeds from assets sold, before the end of the reporting period.
(d) the determination after the reporting period of the amount of profit-sharing or bonus payments, if the entity had a present legal or constructive obligation at the end of the reporting period to make such payments as a result of events before that date (see IAS 19 Employee Benefits).
(e) the discovery of fraud or errors that show that the financial statements are incorrect.
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Accounts payable: Electricity |
10,000 |
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Distribution (selling expense): Electricity |
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10,000 |
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Distribution (selling expense): Electricity |
11,000 |
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Accounts payable: Electricity |
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11,000 |
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1/31/X1 | 31.1.X1 |
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Accounts payable: Electricity |
11,000 |
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Cash |
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11,000 |
Alternatively, XYZ adjusted the subsequent period.
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12/31/X0 | 31.12.X0 |
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Distribution (selling expense): Electricity |
10,000 |
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Accrued expenses: Electricity |
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10,000 |
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1/15/X1 | 15.1.X1 |
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Distribution (selling expense): Electricity |
1,000 |
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Accrued expenses: Electricity |
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1,000 |
As outlined in IAS 37.11.b, accruals are liabilities for goods or services that have not been formally invoiced or agreed with the supplier, including payroll items like vacation pay, that must be estimated, although the uncertainty is much less than provisions (ASC 450-20 does formally distinguish between contingent liabilities and accruals).
However, in practice, the difference between accounts payable and accrued expenses is more prosaic.
In short, if the amount is known or the entity expects to be able to adjust it before issuing its financial statements, it would recognize a payable. If the amount must be estimated and the entity does not expect to be able to make the adjustment, it would recognize an accrued expense.
Common practice, especially at subsidiaries of international companies where a closed period must be reported two to three days flowing period end, is to make adjustments to estimated items in the subsequent period.
While not fully consistent with letter of the guidance, as it saves time, cost and reduces the protentional for errors, it is generally considered acceptable policy. Nevertheless, judgment should be used to make sure that material estimates are adjusted in a way that is fully consistent with the guidance.
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1/31/X1 | 31.1.X1 |
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Accrued expenses: Electricity |
11,000 |
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Cash |
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11,000 |
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Alternatively |
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12/31/X0 | 31.12.X0 |
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Distribution (selling expense): Electricity |
10,000 |
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Accrued expenses: Electricity |
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10,000 |
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1/31/X1 | 31.1.X1 |
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Distribution (selling expense): Electricity |
1,000 |
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Accrued expenses: Electricity |
10,000 |
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Cash |
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11,000 |
Uncommon in practice, and not good accounting, the above is occasionally used to save time and effort.
Alternatively, XYZ adjusted retained earnings.
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1/31/X1 | 31.1.X1 |
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Retained earnings |
1,000 |
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Accruals: Estimated liability: Electricity |
10,000 |
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Cash |
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11,000 |
It is important to note that, generally, an adjustment to retained earnings may only be made if it involves a change in policy or principal, a change in entity (US GAAP) or a correction of an error.
However, some practitioners are of the opinion that, since it achieves the proper matching of revenue and expenses, adjustments to period end estimates that were not corrected (as outlined AU Section 560 and IAS 10) prior to the date when the financial statements are authorized, should not be recognized as an adjustment of income or expense in the subsequent period.
In contrast, other practitioners are of the opinion that no income or expense should ever bypass the income statement even if the adjustment results in period mismatch.
As neither IFRS not US GAAP provide explicit guidance on this issue, the practice of adjusting retained earnings, while rare, can be encountered in practice.
Note: if the difference between the estimated income or expense, and the recognized income or expense is the result of an error, it would be presented as a restatement per IAS 8.49 / ASC 350-10-50-7.