CLOSING OF BOOKS III.

The third part of our newsletter series dedicated to the closing of books will present the main tasks to be performed in connection with the closing of books through the individual tasks and valuation procedures relating to the rows of the liability side of the balance sheet.

Equity and the related reconciliation:

• A table reflecting the variation of the shareholder’s equity within the business year and the underlying reasons is a mandatory component of the Supplementary Notes of the report too. The basis is the sub-ledger to be reconciled with entries in the general ledger. Some fundamental reconciliation steps may also be taken while preparing the variation table:
  • Verification of the transfer of previous year’s net profit into the profit reserve.
  • In relation to foundation-restructuring and research-development the accounting of the required tied-up reserve (from the profit reserve) needs to be assessed; in addition, it needs to be checked whether or not any allocation has been reversed to reflect the change in the related intangible assets balance sheet row, if the allocation was made in any of the previous years (based on depreciation or derecognition).
  • For development reserves it needs to be checked whether or not the required tied-up reserves were accounted (from the profit reserve) and, if the allocation was made in any of the previous years, the reversal of the allocation in proportion to capitalisation should also be monitored in the subsequent years. The development reserves must be absorbed within 4 tax years, although the period of absorption was 6 years for development reserves generated in 2008. Corporation tax is payable with default penalty on any part of the reserves, that has not been used.
• The rule applicable to value adjustments stipulates that valuation be performed and also approved by an auditor each year. The amount of revaluation reserves must also be updated in the balance sheet under equity.
• The provisions of the accounting policy on the headings of the balance sheet must be revised and compliance with valuation and classification principles must be checked.
• The dividend payment limit should also be checked in relation to dividend payment.
• Adequacy and assessment of the shareholder’s equity by reviewing the equity/registered capital ratio - the applicable guidelines are contained in our newsletter published under the title of Shareholder’s equity on 20 October 2014.

Reconciliation relating to provisions:

• Checking correspondence between sub-ledger and the general ledger entries.
• Article 41 (1)-(4) of the Accounting Act provides guidance on the mandatory and optional provisions and the most frequently applied types thereof:
  • Guarantee provisions - such provisions need to be calculated and described in the accounting policy by taking into account the specificities of the company.
  • Payments to be made in relation to several pay
  • Provisions set aside for penalties and payments likely to be imposed in litigation based on consultations with contracted lawyers.
  • Provisions set aside for the tax penalty payable at the rate of 20% of the shortfall in the fulfilment of the tax replenishment obligation. In the course of the “replenishment process”, taxpayers must pay in at least 90% of the corporation tax, projected for the fiscal year.
• The provisions of the accounting policy on the headings of the balance sheet must be revised and compliance with valuation and classification principles must be checked.
• Adjustments to the corporate tax base. Any new provision needs to be indicated as an item increasing the tax base, and any released provision needs to be indicated as an item reducing the tax base.

Reconciliation of long-term and short-term liabilities:

• Checking correspondence between sub-ledger and the general ledger entries.
• The provisions of the accounting policy on the headings of the balance sheet must be revised and compliance with valuation and classification principles must be checked.
• In relation to trade payables, it is extremely important to review the underlying basis of receivables from the largest suppliers prevailing at the end of the year - an invoice may be missing which either has already been paid or an already transferred amount may not need to be listed among the trade payables because the transfer relates to an advance payment. If during such controls, it is concluded that the claim is justified, it needs to be restated in the balance sheet to the other receivables.
• In relation to trade receivables, receivables with a credit balance need to be stated among the other short-term liabilities (see Closing of books, Article II)
• Classification of short and long-term liabilities in the balance sheet
  • as regards borrowing and credit, the relevant contracts are to be applied
  • for loans and leasing transactions, the repayments due in the subsequent year pursuant to the repayment schedule, also attached to the contract, must be stated among the short-term liabilities
• Separation of liabilities to associated enterprises in the balance sheet – independent of the classification of long-term or short-term liabilities. Performing reconciliation with associated enterprises in respect of receivables (e.g. liabilities, return (yields)) vis-à-vis each other and in respect of expenses may prove useful because such may facilitate year-end consolidation if a corporate group is subject to such.
• Checking the completeness of the recognition of return (yields) and expenses relating to balance sheet rows – e.g. accrual or deferral of last month’s interest expense on the basis of the relevant calculations.
• Reconciliation of the liabilities to the tax authority and the tax account. If there is a receivable in any tax type in the books (and it is consistent with the tax account) it needs to be restated to the other receivables in the balance sheet when the report is prepared.
• The items denominated in foreign currencies must be restated at the exchange rate of the cut-off date, irrespective of any limit.

Reconciliation of accruals:

• Checking correspondence between sub-ledger and the general ledger entries.
• The provisions of the accounting policy on the headings of the balance sheet must be revised and compliance with valuation and classification principles must be checked.
• It needs to be reviewed, not later than during the year-end closing whether all items included in the open accruals and realised during the business year have been reversed.
• After the closing date, at least the invoices cancelled and issued during the first few weeks need to be checked to make sure whether any cancelled or corrective invoice was issued that relates to the invoices issued during the year prior to the cut-off date. Such items need to be stated among the deferred income.
• In the case of support received to pay off expenses any amount, not yet used for payment needs to be stated against the deferred revenues. It is recommended to review the accrued items at the end of the year to conclude the amount of expenses accounted against them and whether or not the respective other revenues have been accounted.
• If there are regular expenses, it needs to be checked and the charge cards should also be reviewed to make sure that the items of the last month were also accounted. If the respective supplier invoices have not been received by the balance sheet preparation, then the expenses need to be approved in accordance with the experience of the previous period.
• It is practical to check the completeness of the recognition of return (yields) and expenses relating to the balance sheet rows on the asset and liability side – e.g. accrual or deferral of the interest expenses of loans on the basis of the relevant calculations.
• The Accounting Act contains provisions for the accounting of any difference between the forward and market rates of the forward portion of settlement forward, option and swap transactions. Consideration must be given to the items to be accrued pursuant to the provisions of the law - the impact may increase the profit, in which case the revenues should be stated among the accrued income.

For any item accounted as extraordinary revenues and showed as deferred revenue, it needs to be checked whether or not the accrual was reversed when the specific cost, or a pro rata amount of the cost of the related asset was accounted as a cost or expense.