VAT on accruals

Topics related to local GAAP, audit, laws and regulations affecting financial reporting, non-GAAP measures, investor relations, internal control over financial reporting, XBRL, pro-forma information and other similar topics.
Post Reply
User avatar
Marek Muc
Site Admin
Posts: 2115
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland
Contact:

VAT on accruals

Post by Marek Muc »

Do you recognise VAT on accruals, i.e. before receiving actual invoice? Why / why not? Is it any different under IFRS and your local GAAP?

For example: you're working with a legal firm that charges by the hour. Your year-end date is 31 December. In December 20X1, they worked on a project for you and you know that it will cost you $100k plus 20% VAT (recoverable). You recognise an accrual as at 31 December 20X1, because the legal firm issues the invoice in January 20X2 (assume it's allowed by the tax law).

What are you entries for 20X1 year-end?

Approach 1:
DR legal expenses $100k
CR payables $100k

Approach 2:
DR legal expenses $100k
CR payables $120k
DR VAT to be recovered (asset): $20k
JRSB
Trusted Expert
Posts: 864
Joined: 01 Mar 2020, 01:10
Location: UK

Re: VAT on accruals

Post by JRSB »

I never would - non-technical reason being that the service itself has been consumed but the VAT liability/debtor doesn't arise until an invoice is raised

doubt local gaap rules here comment on the issue
User avatar
Marek Muc
Site Admin
Posts: 2115
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland
Contact:

Re: VAT on accruals

Post by Marek Muc »

but one could argue that the VAT liability is there along with the liability for the service and it results from the tax law, pretty much the same way of thinking as for the net amount
in other words: once you determine that you have to pay the net amount, it inevitably means that you have to pay VAT and the invoice just determines the timing of payment

I've heard that it's common to recognise VAT on accruals in France and this was carried forward from local GAAP, but I'm not sure whether this is really the case
JRSB
Trusted Expert
Posts: 864
Joined: 01 Mar 2020, 01:10
Location: UK

Re: VAT on accruals

Post by JRSB »

I wouldn't be surprised if there was a lot of differing treatments.

in terms of interaction with management accounting/vAT accounting it makes things easier to match VAT accounting to invoices too
pub_acco
Trusted Expert
Posts: 308
Joined: 19 Mar 2020, 16:40

Re: VAT on accruals

Post by pub_acco »

It's common in my country to accrue VAT when the work is done but before receiving invoice. I believed it depended on VAT laws in a country and an asset should be recognized when the VAT is legally recoverable.

Is it technically under the scope of IFRIC 21?
User avatar
Marek Muc
Site Admin
Posts: 2115
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland
Contact:

Re: VAT on accruals

Post by Marek Muc »

recent research by the IFRS staff shows that VAT is generally considered to be within the scope of IFRIC 21:

https://cdn.ifrs.org/-/media/feature/me ... yments.pdf

I don't think that a tax law will have an effect here, rather some kind of "this is how we've always done in this country"

under IFRIC 21:
What is the obligating event that gives rise to the recognition of a liability to pay a levy?
The obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the legislation.
I can imagine arguing that for purchases, the obligating event to pay VAT is the receipt of the invoice from the supplier. For sales (AFAIK), the obligating event is the sale itself (normally you are legally bound to issue a VAT invoice). But I doubt that there are entities who accrue VAT on sales, but don't do it for purchases. It's rather all or nothing approach.

Happy to hear how it's done in other countries. So far:

(Generally) don't accrue VAT in: UK, Poland
(Generally) do accrue VAT: Japan
JRSB
Trusted Expert
Posts: 864
Joined: 01 Mar 2020, 01:10
Location: UK

Re: VAT on accruals

Post by JRSB »

quickly looking at another a forum (if that's allowed) - verifies my view (although again on the basis of a tax-law reason, rather than accounting theory).

https://forums.aat.org.uk/Forum/discuss ... lude%20VAT.
User avatar
Marek Muc
Site Admin
Posts: 2115
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland
Contact:

Re: VAT on accruals

Post by Marek Muc »

all on-topic links are allowed :)
User avatar
Marek Muc
Site Admin
Posts: 2115
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland
Contact:

Re: VAT on accruals

Post by Marek Muc »

JRSB, let's say that VAT is not recoverable by the enitity and ultimately ends up as expense in P&L. Do you still wait for actual invoice before recognising this expense?
JRSB
Trusted Expert
Posts: 864
Joined: 01 Mar 2020, 01:10
Location: UK

Re: VAT on accruals

Post by JRSB »

No because I guess the principle is that the P&L effect is important (if recoverable its just accruals/receivables)
JRSB
Trusted Expert
Posts: 864
Joined: 01 Mar 2020, 01:10
Location: UK

Re: VAT on accruals

Post by JRSB »

(Ie yes accrue full amount).
User avatar
Marek Muc
Site Admin
Posts: 2115
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland
Contact:

Re: VAT on accruals

Post by Marek Muc »

you're talking like a management accountant :lol:

either there is a liability to pay VAT when the accrual is recognised, or there isn't
the debit side shouldn't matter here :idea:
JRSB
Trusted Expert
Posts: 864
Joined: 01 Mar 2020, 01:10
Location: UK

Re: VAT on accruals

Post by JRSB »

It's like an invoice issued before year end that is both a payable and a prepayment - commonly ignored I suspect.
User avatar
Marek Muc
Site Admin
Posts: 2115
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland
Contact:

Re: VAT on accruals

Post by Marek Muc »

Ignored by those focused on P&L only :) Actually you can ignore IFRS 16 as well, it's mostly unnecessary additional liabilities and assets :)
Leo
Posts: 537
Joined: 05 Apr 2020, 22:31

Re: VAT on accruals

Post by Leo »

VAT was a concept invented by french, so maybe useful to get a feedback from them :

In terms of service rendered but not invoiced yet, you book the corresponding VAT in the account : "TVA sur factures a établir" = VAT on invoices to be made.

But this doesn't mean that the payment will be made in January, for the month of December.

If the revenue is sale of product, the obligating event is based on the reception of the product by the client.
If the revenue is sale of service, the obligation event is based on the reception of the money in the bank.

I can recall when I first started in accounting, I used to take the bank general ledger and filter the revenue sub account corresponding to services, and declare the amount based on it.
User avatar
Marek Muc
Site Admin
Posts: 2115
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland
Contact:

Re: VAT on accruals

Post by Marek Muc »

Seems like a mix of accounting and tax tradition, wouldn't expect it to be universally applicable outside of France
Post Reply