If a company wants to begin accruing for property taxes (which has never been done before now) they will pay in January, would you start accruing 1/12 of the total each month for the next 7 months, or do a catch-up entry in starting month for the prior 5 months missed? Opening the books and restating financials for the past 5 months would not be ideal. Thanks!
Property Tax Accrual
Answers
I would do a catch up.
a. recognize the prior 5 months on the 6th month (plus 6th month) and do 1/12 thereafter. Conservatively, this is the preferred option as you are reporting what you know the numbers should be on the 6th month.
b. MY preference - 1/7 for the next 7 months. (as the “shock” is distributed). At the end of the year, you should be where your numbers should be.
Technically, restating would mean your whole year financials were audited and there was a significant error in your financials. So I would not term it as restating the last past 5 months. In the grand scheme of things, your monthly financials matters less than your year end numbers.
The variance (if any) and sudden change/blip can be explained via management reports.
Some CPA’s suggest that you start accruals at the start of the next period. So for you, you would not accrue until January for the next year. In a private company, I don’t see that it would matter though, and both of Emerson’s suggestions are excellent.