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Accounting for non-refund

Accounting for non-refund

PUBLICATIONS \ 09.07.2020

The cancellation of business trips and suspension of activity of the majority of enterprises as a result of restrictive measures resulted in a huge amount of repayments and losses for businesses associated with it. Victoria Skvortsova, Head of Acsour’s Accounting Department, considered in detail all the nuances of accounting for such transactions.

The accounting procedure for transactions associated with the refund or cancellation of forthcoming events on which funds were spent is always a “pain in the neck” for the accountant. This process requires a specialist to take into account a comprehensive analysis of the situation, and sometimes to have an ingenuity. After all, to accept such expenses in costs, it is necessary to prove the economic expediency of spending funds on failed events, which is not so easy.

Business trips

If a business trip is cancelled owing to objective factors, such as quarantine, flight cancellations, border closures, etc., visa processing costs, ticket refund fines, and other expenses may be recognized as part of the accepted expenses for income tax purposes. Let us have a look at an action plan that will help to confirm the validity of the company’s expenses for the cancelled business trip.

The first step is to draw up an administrative order. The document should specify all the special characteristics, particulars and reasons for cancelling a business trip or any other failed event in the company. In the order, it is also important to specify an action plan for each type of expenses that was previously planned in the budget, and appoint persons responsible for monitoring. If advances have already been received for a cancelled business trip, it is necessary to provide for the payment procedure with employees. In addition, the order should specify the procedure for compensating employees’ expenses and describe the rules for refunding previously unused funds received on condition of accountability.

Based on the order, the accountant will be able to determine the accounting procedure for certain expenses and require the responsible persons to draw up the necessary supporting documents.

As justification for the cancellation of work trips owing to the pandemic, it is possible to refer to the following sources in the order: clause 18 of the Appendix to the letter of the Federal Labour and Employment Service (abbreviated in Russian as “Rostrud”) No. 0147-03-5 dated April 9, 2020; clause 1.3 of the Resolution of the Chief State Sanitary Doctor of the Russian Federation No. 6 dated March 13, 2020; recommendations of the Federal Service for the Supervision of Consumer Rights Protection and Human Welfare (abbreviated in Russian as “Rospotrebnadzor”) No. 02/3853-2020-27 sent by letter dated March 10, 2020; information statement of the Federal Air Transport Agency (abbreviated in Russian as “Rosaviatsiya”); “Information for tourists” approved by the Federal Tourism Agency (abbreviated in Russian as “Rosturism”).

The order will serve as indirect evidence of the validity of the cancellation of business trips or other similar events.

Then it is necessary to analyze the list of expenses incurred and collect supporting documents. If expenses are incurred owing to COVID-19, then such expenses should be recorded by the accountant as part of “other expenses” for accounting purposes in accordance with clause 13 of Russian Accounting Regulations 10/99.

In tax accounting, these expenses may be recorded as losses as part of non-operating expenses in accordance with sub-clause 6 of clause 2 of article 265 of the Tax Code of the Russian Federation. Please note: such expenses are recorded as part of tax expenses without amounts of presented VAT. At the same time, it is necessary to analyze the actual reasons of costs and collect documents confirming the validity of these expenses.

In case of cancellation of a business trip, expenses may be incurred that may subsequently be recorded as losses to the company. For example, these include:

  • processing of visas and voluntary health insurance for employees;
  • fines for ticket refund;
  • fines for cancellation of hotel and transport reservations.

Important nuance: check the terms of the contract for ticket refund or cancellation of reservation. If tickets were purchased through an agent or intermediary, the contract should specify the procedure for refund, calculation of the fine amount, as well as situations in which this fine is not applicable. To accept punitive sanctions or non-refundable ticket prices for tax expenses, the procedure for generating such amounts should be confirmed by the terms of the contract with the supplier. If these terms are specified in the contract, then expenses may be recorded for profit purposes if there are basic source documents for the amount of fine or non-refund (a certificate, calculation of the amount of fine, report, etc.).

Damage to material assets and cancellation of orders

Apart from expenses, associated with business trips, during the pandemic, companies may also incur direct expenses for orders that were cancelled, or expenses for destruction and disposal of expired products that were not subject to sale.

Such expenses should be recorded as part of other expenses for accounting purposes and in non-operating expenses for tax purposes.

For documentary confirmation of expenses, it will be necessary to collect documents such as an order, a certificate of inventory of goods and materials for writing off unusable goods during the pandemic, as well as claims, cancelled applications, and electronic correspondence with clients for cancelling orders under supply contracts or contracts for the provision of works or services.

Refund of accounts receivable

In the context of a sales slowdown and crisis, the most urgent issue is the refund of accounts receivable. This includes payment for goods delivered, works and services rendered by business partners who, owing to objective reasons, may not be able to pay your company.

To control and timely receive payment from customers, it is important to describe in detail the terms of settlement payments and punitive sanctions in case of payment delay in the contract, as well as to save documents confirming the fact of delivery of goods or provision of services. In addition, signed originals of the contracts with the customer, waybills, and certificates signed by a representative of the business partner stating that the good or service has been accepted are necessary for you. These documents may be required in court if it is not possible to recover accounts receivable as part of a peaceful settlement of disputes. If you still have an overdue accounts receivable and there are doubts about the possibility of its recovery, the accountant should think about creating reserves for doubtful debts. It is necessary to accurately reflect the current situation in the accounting, and if the conditions of the Tax Code of the Russian Federation on the creation of reserves are met, this will allow to record for income tax purposes the expenses on the reserve, which in turn will reduce the tax.

There is another type of accounts receivable that enterprises may encounter during a pandemic. It is associated with advances to suppliers of goods, works, and services. Such accounts receivable occurs if payment in the form of advance for goods, works, or services has already been sent to the supplier, but the service or good has not actually been delivered.

In this case, it is important to provide the most advantageous terms of the contract for your company, so that in the event of any changes or refusal to deliver goods or provide services for justified reasons, your advance payment will not be lost, but may be refunded in full or used in the future. If you have reason to suppose that the paid advance may not be refunded, or there is a dispute with the supplier as regards the recognition of the terms of the contract as fulfilled, you should also consider creating reserves for doubtful debts. It is created only for accounting purposes and can not reduce your tax, but reflecting the reserve in the accounting will allow to correctly look at the current situation.

When you create a reserve for doubtful debts, reflect the following entries in the accounting:

Debit 91-2 Credit 63 – for the amount of the created reserve for doubtful debts;

Debit 63 Credit 62 (60, 76) – for the amount of write-off of bad debt at the expense of the reserve for doubtful debts;

Debit 63 Credit 91-1 – for the amount of restoration of the reserve as regards the repaid accounts receivable.

Line of defense

Doing business is directly associated with financial risks, therefore any additional unplanned costs incurred in the company’s activities may lead to various consequences: from a partial slowdown in activity to the loss of business. However, in order to minimize additional costs, we recommend to study the possibility of implementing some preventive measures.

Accuracy of wording. To check the presence of refund conditions in contracts with suppliers, the possibility of cancelling or postponing the order if the service or material assets cannot be used under such circumstances as quarantine, prohibition of conducting business based on federal and local legislative acts, border closures, and other circumstances.

Advantageous terms. Monitor the presence of the most advantageous terms for you in contracts with customers as regards deferred payments, refusal of delivery, and payment terms for goods, works, or services.

Risks assessment. If you need to purchase tickets and book a hotel for employees, consider the possibility of a full or partial refund in case of any changes or cancellation of reservation. The relevant rules and regulations may be stipulated in the company’s internal regulatory documents so that all employees and the Procurement Department follow the company’s established rules and regulations.

Guarantee of protection. To avoid other risks or to cover direct losses in other situations, companies should provide insurance for the largest transactions and contracts.

Victoria Skvortsova

Head of Accounting Department