Just as everyone is busy observing Christmas traditions like wrapping gifts for loved ones, including Santa Claus who also has to finalize his list up to his knees, accountants are busy filling out their accounting checklists and to strive to conclude the year-end requirements to close the books.
With just a few weeks to go until the end of the year, accountants are busy preparing their books of accounts and other documents for financial and tax reporting purposes. To handle the myriad of year-end accounting activities, I decided to share my own little list of guidelines to help ensure tasks are completed on time.
1. PREPARE AN END-OF-YEAR CLOSURE SCHEDULE
Accountants should define timelines and activities for completion at the end of the year. For example, timelines should include data collection, processing, review, reconciliations, and financial reporting deadlines. Next, target dates should be put on a calendar to ensure the timely completion of all required year-end accounting activities.
2. MAKE A LIST OF END OF PERIOD ENTRIES
End-of-period postings include transactions that are typically not processed during regular processing. These include postings covering non-monetary transactions, such as converting foreign currency denominated account balances, accumulating completed transactions without invoicing / sales invoices, depreciation of property, plant and equipment, depreciation of prepayments, adjustments to comply with accounting standards, and other end of period entries.
Accountants should list all period-end postings as a guide for closing the books of account.
3. COLLECT ALL REMAINING DOCUMENTS
To facilitate the closing of books, accountants should collect all accounting documents, such as sales invoices, invoices, account statements, official receipts, purchase orders, delivery receipts, contracts and others. All transactions that occur up to the end of the fiscal year must be fully, accurately and properly recorded in the books. Otherwise, unrecorded transactions can lead to an underestimation or overestimation of account balances, giving rise to questions from regulators [e.g., Bureau of Internal Revenue (BIR) and Securities and Exchange Commission (SEC)] when reviewing financial statements / books of account.
4. REVIEW DETAILS OF ACCOUNT BALANCES
The transactions making up the account balances must be sufficiently reviewed. Accountants should assess whether all transactions comply with the applicable accounting framework: Philippine Financial Reporting Standards (PFRS), PFRS for Small and Medium Entities (SMEs), and PFRS for Small Entities (SE).
Under Rule 68 of the SEC’s Revised Securities Regulatory Code (SRC), the PFRS applies to large entities and / or public interest entities. Large entities are those with total assets greater than 350 million pesos or total liabilities greater than 250 million pesos, while public interest entities are those that meet one of the following criteria:
I. hold secondary licenses issued by regulatory bodies;
ii. are required to file financial statements under Part II of RSC Rule 68;
iii. are in the process of filing their financial statements for the purpose of issuing any class of instruments on a public market; and
iv. other companies that the SEC might consider in the future to be of public interest, regardless of the lack of a requirement to obtain a secondary licensee from the SEC.
The PFRS for SMEs should be used by medium-sized entities, which have total assets of more than 100 million pesos but not more than 350 million pesos or total liabilities of more than 100 million pesos but not more than 250 million pesos, while the PFRS for SEs applies to small entities, which have total assets or total liabilities between P3 million and P100 million. In addition, they should not meet the criteria of points (i) to (iv) mentioned above.
5. PERFORM THE RECONCILIATION OF THE ACCOUNTS
The account balances must agree with the annexes and supporting documents. Here are some examples: (i) bank reconciliation to match cash book balance with bank statements; (ii) reconciliation of accounts receivable to match the accounting balance with the age analysis; (iii) reconciliation of tangible assets to match the expiration schedule; and (iv) reconciliations of other account balances. All reconciliation items should be properly supported and adjusted, if necessary, in the books of account.
6. ORGANIZE THE ACCOUNT BOOKS FOR SUBMISSION TO BIR
There are three types of books: textbooks, loose-leaf, and computerized. Businesses using BIR-approved loose-leaf books of accounts are required to submit bound books for the tax year within 15 days of the end of each tax year (no later than January 15 for taxpayers operating over a calendar year). On the other hand, companies using computerized accounting books approved by the BIR must submit their books for the tax year within 30 days of the end of each financial year (no later than January 30 for taxpayers of the calendar year ). For businesses using manual books, the annual submission is not required. However, a new set of books should be saved when there are no more pages to write on.
7. PREPARE THE BOOKS OF ACCOUNTS FOR THE YEAR-END FINANCIAL AUDIT
For the purposes of the BIR, under the Tax Reform for Acceleration and Inclusion Act (TRAIN), the books of all companies with gross receipts of at least P 3 million in a year taxation should be audited by an external auditor.
For the purposes of the SEC, the following are the thresholds for auditing accounting records defined under the revised Rule 68 of the RSC:
I. Joint-stock companies and not joint-stock companies with total assets or total liabilities of at least P 600,000;
ii. Branches / representative offices of foreign joint-stock companies with assigned capital of at least P 1 million;
iii. Branches / representative offices of foreign companies without shares with total assets of at least 1 million pula; and
iv. Regional operating headquarters of foreign companies with total revenues of at least P1 million.
Companies with a financial year ending December 31 are required to submit their annual audited financial statements (AFS) to the SEC in accordance with the annual AFS filing schedule. For those whose year-end is not December 31, the VFA is due within 120 days of the year-end. In addition, the AFS must be sent to the BIR within 15 days of the deadline for electronic filing of the annual income tax return.
With proper planning, accountants can complete their financial reports on time, in full compliance with regulatory requirements. After working with a busy schedule, accountants can finally end the year by closing the books and starting to unwrap the holiday gifts.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only and should not be used as a substitute to specific advice.
Jane R. Alcause-Fabro is Director of Client Accounting Services at Isla Lipana & Co., the Philippine company that is a member of the PwC network.