Wearing my technical accounting nerd hat today 😊 Occasionally, I see accountants book expense accruals/liabilities when I don’t believe they should be booking them, so here is my interpretation of the rules: Example: It’s Q4 2025. You’ve just signed your tax engagement letter for the 2025 tax year and your tax advisor has quoted you a fee for their work. No work will be performed by your tax advisor until Q1 2026. You are closing the books for 2025 and you book an accrual for the service fee in Q4 (to “match" the expense to the period it benefits). Seems logical and the correct thing to do, right? Well, here is the catch - Under US GAAP accrual basis accounting, expenses for services are recognized when they are incurred, which is when the services have been rendered or performed by the provider. FASB’s Concepts Statement 6 (CON 6) states that "liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events". In this example, since the past event (performing the services) has not occurred as of December 31, 2025, there is no expense to be booked and no liability to be recognized as of the balance sheet date. Perhaps a footnote disclosure for the commitment to pay if they do the work but not a booked liability. The obligation to pay for the services will be created in 2026 when the work is performed and that’s when the expense will be recognized. I know I have many seasoned CPAs and auditors in my network so do let me know please if you have a different view on this.
One good barometer question here: does the vendor still need to *do the work* in order to earn the payment? In your example, the tax provider’s engagement letter gives comfort they will get paid… if (and only if!) they do the work both parties agreed on. As they complete the work, they earn the right to payment the Company’s liability represents. (For further illustration, take lease liabilities. While seemingly an outlier, the landlord does not need to do a thing to keep collecting those rent checks after turning over the keys. Liability is incurred at commencement. 😊) I agree with you (and seeing CON statement references in my feed made my morning!) but one of my #1 struggles explaining accounting to non-accountants. I’m always looking for ways of getting intuitive buy-in before resorting to the technical and hope the screening question above is helpful!
There is clearly no liability as services are not like litigation or a warranty or a liability for loss on your annual inventory account. Just being a company does not create a tax liability as it can be performed internally and no services have been performed. The inverse, your tax accountant couldn’t recognize revenue. You are correct and many people think if you make you results look worse sooner it is ok. Incorrect is incorrect regards less of making results better or worse.
Joel Dube, CPA
8mo
In practice there’s so much more grey area than one would imagine in implementing the accounting rules. In this instance I’ve seen occasions when consistency rules the day versus literall interpretation. And the new rules are consistently introducing more and more judgment.
Tanya Bakalov
8mo
I would book a prepaid expense (Asset account, not an expense or a liability) and then when the expense actually occurs in the New Year, would reverse the prepaid expense = reduce the asset account to zero) and book the expense in 2026. So no, it's not an expense or a liability in 2025, it is actually an asset in 2025. Long time since I have practiced being a CPA but I think that's the correct way of handling it on the G/L/
Great post, agree with your take under US GAAP that no real past event means no liability to book per CON 6 and yes just disclose the commitments. On the IFRS side it's pretty much the same story as IAS 37.14 calls for a present obligation tied to a past obligating event and merely signing a contract for future services is an executory contract (IAS 37.3) so no asset or liability until the services kick in. No Q4 accrual needed in either world!