Are Accruals Financial Liabilities

[raphaeljanks]

Hi All

I just wanted to confirm WHY accruals will not meet the definition of a financial liability? My understanding is that in order to have a financial instrument, it has to give rise to a financial asset in one entity and a financial liability in another.

Now an accrual represents an amount owing which has not yet been invoiced. So technically, the creditor has not raised an invoice yet hence there is no receivable in his books and hence the definition of a financial instrument is not met? Is my understanding correct?

[Marek Muc]

I generally disagree. If you have a contract with eg a supplier and they fulfil their obligations, then you have a contractual liability to pay them even if the invoice is not yet received. The main purpose of the invoice is to document the transaction for tax purposes. And BTW your supplier will recognise an accrued receivable too.

[raphaeljanks]

Thanks Marek. There seems to be differing opinions on this though. Some financial statements present accruals as financial liabilities.... whilst some do not. Hence the reason for my question. If there any specific guidance on this?

[Marek Muc]

Actually IAS 1 requires to present trade and other payables separately from other financial liabilities (IAS 1.54) and most accruals are trade payables

Some related discussion is included in IFRS 15 from the seller's side, have a look at this page and follow references to IFRS 15:
https://ifrscommunity.com/knowledge-bas ... abilities/

[raphaeljanks]

Thanks Marek

For a transaction to fall into trade payables, then an invoice would have to be issued by the creditor. That would be the main difference between a trade payable and an accrual.

[Marek Muc]

that's just your opinion

I don't see any reason to present accruals separately from invoiced payables (not to be confused with provisions)

[raphaeljanks]

Not only my opinion but also how most entities record trade payables (well most of the entities that I came across). Also, from an audit perspective, the argument of recording an amount as a trade payable without an unconditional obligation existing (either in the form of an invoice or some other form of "demand", would not suffice.

If accruals and trade payables were interchangeable.... then the two distinctions wouldn't exist.... now that is my opinion

[Marek Muc]

well, recording them in the books is a different discussion from presenting them in financial statements

[DJP]

Here's my 2 cents' worth:

Any accrual associated with a financial liability, is part of that financial liability. Accruals are just a component of a financial liability's measurement. So... if an accrual relates to a trade payable, it shall be reported as a trade payable.

It might be the case that some companies present accruals in different line items on the balance sheet, but that is not entirely correct. There has always been a debate around presenting, for example, interest accruals on borrowings separately from the respective borrowings. Some companies do that, but that is not entirely correct and I've seen auditors pushing back on that.

[Marek Muc]

yep, accrued interest is just an integral part of the amortised cost!

[JRSB]

I have seen, in BDO-audited accounts, accruals included in contractual maturities of liabilities, presumably based on an estimate of future billing and due dates...

There's a thread with a theoretical debate about what an accrual is here somewhere.

[pub_acco]

+1 to the opinions to include accruals in trade payables (or the related liabilities).

In practice, I've seen some practices not to record a trade payable until the invoice is issued, but that's simply because the uninvoiced portion is immaterial. If material, a trade payable must be recognized even if the invoice is yet to come.

[pub_acco]

Perhaps, IAS 37.11 provides an answer. IFRS technically allows both approaches: presenting accruals integrally with payables and separately.

[Marek Muc]

great reference to IAS 37.11 pub_acco!

Accruals are often reported as part of trade and other payables, whereas provisions are reported separately.