Estimated Liabilities in Accountancy
The conditions of including estimated liabilities in reports are defined in Accounatncy Rules “Estimated liabilities, contingent liabilities, and contingent assets” (AR clause 5, 8/2010 as approved by the Ministry of Finance of Russia in Decree No.167n d.d. 12.13.2010, hereinafter referred to as AR 8/2010).
If a company was involved in legal proceedings that may result in penalty or other fees for violating tax regulations, the accountancy shall include the respective amount of estimated liability.
Proceeding from clause 8 of AR 8/2010, the amount of included estimated liability is classified as the same type of expenses as the amount of the tax in question. In case the estimated liability is conceded due to violations of revenue tax procedures, this liability is classified in debit of account 99 “Revenues and losses.”
Working with estimated liabilities is known to Russian accountants since 2011. Still, one shall note creation of estimated reserves for relationships with commercial counterparties.
Specific Features of Reflecting Estimated Liabilities
The Ministry of Finance’s recommendations as to accountancy audit for 2016 (appendix to the Ministry’s letter No. 07-04-09/78875 d.d. 12.28.2016) highlight the state of settlement with the budget, and the events related to possible losses incurred by the company during legal proceedings. It is noted that, in case of an ambiguous tax-related instance, accountants shall reflect an estimated reserve to the amount of a possible penalty or other fee.
The recommendations clarify which expense accounts shall reflect reserves for possible losses arising from negative court rulings as to disputes with tax authorities concerning certain taxes.
Amounts of accrued taxes are reflected in different expense accounts depending on their type. For instance, transport taxes for trade organizations are usually reflected in account 44 “Sell expenses,” while property tax usually ends up in account 91 “Other expenses.” Companies that provide only services reflect transport tax in account 20 “Main production” or 26 “General expenses” (if the car is used by a CEO). Ecological dues should be included in account 44 “Sell expenses.” All companies shall reflect revenue taxes in account 99 “Revenues and losses.”
The amounts of due tax sanctions, according to the Instruction on Using a Book of Accounts, shall be reflected in account 99. According to the clarifications provided in the Recommendations, the amounts of estimated reserves shall be reflected in the same accounts that correspond to the taxes on which those reserves have been assessed.
Please note, that it has nothing to do with assessing the reserve on arrears of the tax. Tax authorities are entitled to deduce the tax arrears from the company’s operating account without recourse to court (subclause 1 of clause 46 of the RTC), and they usually use their right to do so.
EXAMPLE
Pursuant to the results of on-site tax audit in 2016, Terminal LLC had to pay penalties to the amount of: 10,000 rubles for VAT; 5,000 rubles for transport tax; and 20,000 rubles for revenue tax.
Aside from that, fines were assessed as follows: 300 rubles for VAT; 100 rubles for transport tax; and 600 rubles for revenue tax.
The company challenged the tax authority’s decision in court. The proceedings will commence only in 2017, and the probability of court ruling in favor of the company is minimal.
The transport tax at Terminal LLC is reflected in account 44 “Sell expenses.”
Prior to preparing accountancy statements, Terminal’s accountant assessed estimated reserves to the amounts of possible losses in the tax dispute that is to be considered in court, on the basis of amounts of penalty fees and fines specified in the tax authority’s decision pursuant to the on-site tax audit, and reflected the operations in the account as follows:
DEBIT 99 CREDIT 96
- 10,300 rubles (10,000 + 300) - assessed reserve for the amount of the penalty + fine for VAT
DEBIT 44 CREDIT 96
- 5,100 rubles (5,000 + 100) - assessed reserve for the amount of the penalty + fine for transport tax
DEBIT 99 CREDIT 96
- 20,600 rubles (20,000 + 600) - assessed reserve for the amount of the penalty + fine for revenue tax.
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