It is common for companies to be surprised to find that they have not accounted for expenses in fiscal years that have already been closed and to wonder what to do with them.
The tax authorities will only be restrictive if by booking the expense in a later year your company is taxed less than if it had booked it in the correct year.
It is common in companies to find ourselves with the surprise of not having accounted for expenses in fiscal years that we have already closed and to wonder what to do with them.
Whether it is because the invoice never arrived, because it was misplaced, because the entry was left for later and forgotten or for any other reason, it is not surprising that once the fiscal year is closed, expenses or losses that were not accounted for at the time come to light and we are assailed by doubts as to how to proceed now for their accounting registration and possible deduction.
In general, nothing prevents your company from recording and deducting an expense in a subsequent year to the one to which it corresponds. Normally, the tax authorities will accept the deduction in the accounting year (even if it is an item from a previous year), and only in exceptional cases will they object.
In fact, the tax authorities will only be restrictive if by booking the expense in a later year your company is taxed less than if it had booked it in the correct year. For example:
– The tax authorities will not allow you to record and deduct now an expense that corresponds to a year that has already expired.
– Nor will you be allowed to deduct depreciation if the asset in question has already exceeded its maximum useful life.
– It will also regularize the situation if your company has been able to offset losses that, if it had acted correctly, it would not have been able to do so.
However, even if the tax authorities do not suffer any damage and do not say anything, bear in mind that you will not be complying with accounting regulations (which require that income and expenses be recorded as they accrue).
Taxation follows the accounting criterion of allocating income and expenses on an accrual basis, regardless of the dates of collection and payment. However, taxpayers may ask the tax authorities for a different time allocation method, for example, the cash method (the request must be submitted within 6 months prior to the end of the first tax period in which this criterion is to take effect). If the tax authorities do not reply within 6 months, the request is deemed to have been accepted).
Changes in accounting policies, accounting errors and estimates
Of particular importance for the company are the considerations regarding possible changes in accounting criteria, errors, and estimates, all of which are analyzed in Valuation Recording Standard (RSV) 22 “Changes in accounting criteria, accounting errors and estimates” of the General Accounting Plan (PGC) and RSV 21 of the PGC for SMEs.
According to these NRS, when a change in accounting criteria occurs, it will be applied retroactively, and its effect will be calculated from the earliest year for which information is available.
With respect to income or expenses corresponding to previous years arising from such application, in the year in which the change of criterion occurs, in accordance with the NRS, the corresponding adjustment for the cumulative effect of the changes in assets and liabilities will be made, which will be charged directly to equity, specifically, in a reserve item, unless it affects an expense or income that was charged in previous years directly to another equity item.
Likewise, the figures affected in the comparative information of the years affected by the change in accounting criteria will be modified.
At year-end, subsequent events must be reviewed (RSV 22 of the Spanish GAAP) and changes in estimates, errors or changes in criteria must be verified.
It should be remembered that errors and changes in criteria have a retroactive effect (charge or credit to reserves) while changes in estimates have a prospective effect (effect on subsequent years).
In the correction of errors relating to prior years, the NRS establishes that the same rules apply as for changes in accounting criteria. For these purposes, errors are understood to be omissions or inaccuracies in the financial statements of prior years because of not having used, or not having used adequately, reliable information that was available when they were prepared and that the company could have obtained and taken into account in the preparation of those financial statements.
Therefore, to record an expense from a previous year we cannot use the Group 6 account that would correspond according to its nature, but we will use the voluntary reserves account 113, which will be debited for the amount resulting from the net debit effect of the changes experienced by the correction of the accounting error, with a credit to the respective accounts representing the affected assets and liabilities, including those related to the accounting of the tax effect of the adjustment.
– Changes in accounting criteria are applied retroactively considering the new criteria as if it had always been applied. In this case, a tax adjustment must be made for the previous years.
– When it is an accounting error, and the expense was booked at an earlier time or the income later than the accrual, the situation must be regularized by means of a complementary adjustment. When the expense is accounted for later or the income at a time prior to accrual, it can be left as it is, unless there is economic damage to the Treasury.
If when closing the accounts of your company you notice that in previous years you have not recorded any expense, you can now compute it in your accounting in the following terms:
– You will not have to record it in the profit and loss account. As it is an item from a previous year, you will have to charge it directly against the reserves account.
– You can deduct the expense in your corporate income tax by means of a negative off-balance sheet adjustment. However, make sure that the expense meets the requirements to be considered tax deductible, and that no more than four years have passed since the year in which it should have been charged.
For further information, please consult a tax advisor.