In 2009 new Russian Statutory Accounting (RSA, PBU) 22/2009 “Correction of errors in accounting and statements” was introduced. For the first time PBU defines the notion of errors in accounting and statements.  The error means incorrect presentation of economic facts in accounting and/or statements of an organization.

The error may be caused by the following factors:

- improper application of the RF accounting legislation and/or accounting regulatory legal acts;

- improper application of the organization accounting policy;

- errors in calculations and estimates;

- wrong classification or assessment of the organization economic facts;

- inappropriate use of the information available on the date of signing of the financial statements;

- negligent behavior of the organization officers.

According to the clause 3 of the PBU 22/2009 an error is considered material, if it (alone or together with other errors) can influence the economic decisions that users make on the basis of the financial statements for this reporting period. The users mean both internal (head of the organization) and external units (for example, tax inspectors).

New PBU 22/2009 contains detailed regulations regarding the time of the error and the correction procedure.

For example, the error made in the current reporting year detected before the end of that year should be corrected by means of making entries in the corresponding accounts in the month of the current year when the error was detected.

The error of the reporting year detected in the following year, but before the date of signing of statements for this year, is corrected by means of making entries in the corresponding accounts for December of the reporting (previous) year for which the financial statements are prepared.

Immaterial error of the previous reporting year detected after the date of signing of the statements for that year, can be corrected in the period when it was detected.  If the detected error is material there are some alternatives.

If the material error is detected after the signing of the statements, but before the date of its presentation to the shareholders, it can be corrected by means of making entries in the accounts for December of the reporting year. If the report was presented to any external users, then, according to the clause 8 of the PBU 22/2009, it must be replaced by the adjusted report. Such accounting report is called revised.

The revised statements shall disclose the information that this report replaces the originally presented statements, and also the information about the reasons for statements revision. Besides, the revised statements are sent to all users who received the original one.

If the material error was detected after the statements were not only presented to the shareholders and other external users, but also approved in accordance with the established RF legislation, it should be corrected in the following manner: 

1) by means of making entries in the corresponding accounts for January of the current reporting year. In this case the correspondence account in the records is the retained earnings (uncovered loss) account;

2) by means of recalculation of the comparative figures of the statements for the reporting periods, presented in the organization statements for the current reporting year except when it is impossible either to establish connection between this error and a certain period, or to determine the accumulative impact of this error relating to all previous reporting periods.

The recalculation of the comparative figures, according to the clause 10 of the PBU 22/2009, means the correction of figures in statements, as if the error would have never been made. Recalculation of the comparative figures is made starting from that previous reporting period when any error was made.

If the error was made before the earliest of the previous reporting periods presented in the statements for the current reporting year, the corrections are made to the opening balances in the corresponding assets, liabilities and capital items at the beginning of the earliest of the presented reporting periods.

Sometimes the organization cannot practically assess the impact of the error on one or more previous reporting periods, presented in the statements. In this case the organization should adjust the opening balance in the corresponding assets, liabilities and capital items at the beginning of the earliest period, recalculation of which is practically possible.

Recalculation can be considered impossible, if it will require a serious estimation which makes it impossible to find information about the circumstances existing on the date of error, or the information received after the date of the statements confirmation for the corresponding previous reporting period should be used.

According to the clause 14 of the PBU 22/2009, in the note to the statements the organization must disclose the following information regarding the material errors of the previous reporting periods detected in the reporting period:

- type of error of the corresponding previous reporting period;

- for each previous reporting period to the extent it is practically possible, cost of the error correction for each account. If the organization must disclose the information about the earnings per share, then also the adjustment according to the data on basic and diluted earnings (loss) per share;

- cost of the opening balance adjustment of the earliest of the presented reporting periods;

- if the recalculation of any previous period is practically impossible, it is necessary to disclose the reasons why it is impossible, describe how the error correction is to be reflected in the statements, and specify the period, starting from which the corrections come into force, in the note to the annual report.

In addition, the Ministry of Finance of the RF in the order № 106n of October, 6, 2008 approved the accounting standard (PBU) “Accounting policy of the organization” 1/2008 that must be applied when the accounting policy for 2009 is formed (instead of the PBU 1/2008). The PBU 1/2008, on the one hand, retains succession to the PBU 1/98 and does not bring any drastic changes in accounting policy development and disclosure.

 On the other hand, it contains a series of new provisions.

Error in primary document is detected in the processing phase

In this case the corrections to the documents are made only after the agreement between parties who executed and signed the “erratic” document.

The wrong text or amount in the document is crossed out, and the right text or amount is written above. It should be crossed with one line to see what was written. In no way correction fluid can be used to paint the wrong text.

Then the corrected error in the primary document is supplemented by the “corrected” remark. The date of correction and the signatures of the correctors must be pointed out.

If the corrected document arrives at the accounting department, and the corrections are made properly, it can be accepted to accounting.  The accountant should sign the corrected entry, and by doing so approve the correction.

Error in primary document is detected after the statements were presented to the users

If the statements were prepared and presented to user, any errors in primary documents, according to the PBU 22/2009, are corrected in a different way. Such corrections are made based on the revised statements.

The note to the organization statements should contain the following data:

- the title of the document (memorandum), the number and the date;

- the month when the error was detected;

- the cause and the type of the error;

- the measures necessary for the error correction in tax accounting (make changes in the book of record, prepare detailed single tax return, etc.);

- the staff responsible for the accounting of this operation (chief accountant, accountant) and their personal signatures.

Thus, the revised statements together with the note record the fact of the wrong reflection of the business transactions in the accounts and justify the case for making adjustments in ledgers. 

Correction of errors in ledgers

Business transactions are reflected in the ledgers on the basis of primarily accounting documents.  At this stage an accountant also can make a lot of errors.

The order of correction of errors made in the accounting is set by:

- the clause 11 of the Guidance on the order of statements preparation and presentation approved by the order of the Ministry of Finance of the RF № 67n of 07/22/2003;

- the clause 39 of the Russian accounting and reporting standards, approved by the order of the Ministry of Finance of the RF № 34n of 07/29/98.

The error is detected before the statements confirmation

If the error is detected before the reporting year end, the corrections are made in the month of the reporting period, when it was detected. If the error is detected after the year end, but the statements are not confirmed yet, and they are still not presented to the Tax Service, then the error can be corrected by means of making entries in December of the reporting year (clause 6 of the PBU 22/2009).

Example

In January 2008 the expenses under the warehouse lease agreement were not included into the selling expenses.   The services were of production nature and were paid by advance payment.  The services cost 3540 rubles, including VAT of 540 rubles.

This error shall be corrected in the month it was detected, if the year still continues. That is: If you detected the error in May 2008, you should make corrections to the accounting for May, and if you detected it in November, then the error should be corrected in November,

If the error is detected when the year already ends, but the statements for 2008 are still not presented (in January, February or March of 2009), the same corrections are made on December, 31, 2008.

Depending on the error, there are several methods of error correction.

· If a transaction was not reflected in the ledgers, an additional entry regarding the amount of the transaction should be made. This method is usually used in correction of errors in documentation and assessment of property and liabilities. 

In the above example the error should be corrected in this way.

· In the case of a wrong entry a reverse entry is made.

· In the case of a wrong entry in the accounting, it is necessary to make a reverse entry and then put a correct entry. This method is usually used in correction of errors in the correspondence of accounts.

Example

On June 2009 a hairdresser’s received a Certificate of compliance. The term of the Certificate was one year. Cost of work under the certification was 2400 rubles. This amount was charged to expenses at a time.

The enterprise made an error as the expenses under the certification cannot be charged to expenses at a time, because the duration of the certificate is 1 year. That’s why the costs of its receipt should be charged to the cost value of the services provided during the whole year.   These expenses should be preliminary accounted as deferred expenses on 97 account “Deferred expenses”.

Monthly expenses to be included in general expenses amount to 200 rubles. (2400 rub. : 12 months).

The error was detected in September 2009. The corrections were made in the same month.

If the error had been detected in January, February or March of 2010, but before statements confirmation, the same entries should have been made.

The accounting entries date would have been December, 31, 2009.  And the amount of the last entry would have been 1200 rubles (2400 rub. : 12 months x 6 months).

The error is detected after the statements confirmation

If an accountant detected the error in the accounting for the previous year, and the annual report had already been confirmed, then the corrections should be accounted in the current year. The statements for the previous year should be left unchanged.

The errors, made in the previous years, are considered as profit or loss of previous years (the clause 10 of the PBU 22/2009). To correct the error of previous reporting periods an accounting entry should be made in correspondence with the 91 account “Other income and expenses”. By doing this the organization avoids distortion of the sales figures (revenue, cost value, etc.) of the reporting period. In the preparation of the Profit and Loss Statement profits and losses of previous years, detected in the reporting years, are reflected in the Profits and losses breakdown (paragraphs 3-6).

In tax accounting and reporting, income and expenses amounts, appeared due to the error corrections, are reflected in the period when the error occurred.

If the organization applies the PBU 18/02, it should be guided by the letter of the Ministry of Finance of the RF № 07-05-14/219 of August, 23, 2004.

It says that other income (expenses) amounts, reflected in the accounting as a result of the error correction, form permanent differences.  On the basis of this difference the accountant should form a constant tax asset or a constant tax liability.

In the Income Statement (form №2) for the current period the organization should single out a tax amount subject to payment for the period when the error was made in a separate line after the current income tax figure.

Example

Suppose, the error was detected in August, 2010. The annual report for 2009 had already been confirmed and presented to tax bodies. It means that it is impossible to correct the error by making entries for 2009.

That’s why the corrective entries are made in August, 2010.

 In tax accounting lease agreement expenses are included in expenses for 2009. Therefore, income tax amount for 2009 will decrease by 720 rubles. (3000 rub. х 24%).

In calculation of the income tax for the next year of 2010 the errors of previous years, detected in the reporting period, are not accounted. That’s why the amount of the appeared constant tax liability should be reflected in the accounting.

In practice the accountant, detected an improper reflection of the business operation of the previous reporting period after the annual report confirmation, corrects this error by making reverse entries.  This leads to the distortion of the reporting period figures.

Example

In October 2009 the goods were sold from the warehouse OOO “Vulcan” (Limited liability Company) at 6000 rubles, including VAT of 1000 rubles.

In the reflection of the sale operations the incorrect purchase price of the goods was stated.  The actual price was 2000 rubles, while the declared price was 4000 rubles. As a result the stocks figures at the year end and the financial result for 2009 were distorted in the accounting. 

The error was detected in April 2010 after the 2009 balance sheet presentation to the Tax Inspectorate. To correct the error, the accountant made reverse entries.

As a result the stocks amount was adjusted and in this time represented true facts. Meanwhile, this entry led to distortion of the cost of goods sold and the financial result for the 2Q of 2010.

This memorandum will be the primary document. Whereby the accountant will meet the Accounting law requirement, i.e. the accounting is maintained on the basis of primary documents.

Correction of errors in payables to the budget and settlements with non-budgetary funds

The accounting errors almost always affect the calculation of tax, because accounting data is used in calculation of any tax. For example, in calculation of Single Social Tax (ESN), VAT, excise tax, property tax, advertising tax, etc.

Therefore, after the correction of the organization accounting the accountant should check whether these corrections affected the amount of tax liabilities to budget or not.

The amounts of additionally charged taxes and other compulsory payments are stated in the debit side of the tax payment sources in correspondence with the credit side of the 68 and 69 accounts. It refers to the correction of errors of the current year.

The table contains entries that you will have to make if you find errors in tax charge.

· In the case of additional charge of tax direct entries are made.

· In the case of excess tax charge a reverse entry should be made. It means that the correspondence of accounts will stay unchanged. The entry amount will be negative.

As we have already mentioned, additional entries in accounting are made in the reporting period, when the error of the current year was detected.

Example

In October 2008 an accountant found out that Petrov I.I. was incorrectly charged an individual income tax for April 2008. In the calculation of this tax the accountant did not take into consideration a child and did not deduct 600 rubles from the taxable income.  As a result the individual income tax amount was overstated by 78 rubles.

The entry in the accounting is made in the reporting period, when the error of previous years was actually detected.

Any correction made in statements should be confirmed in writing in the memorandum.

Corrections of errors made in statements

Sometimes the errors occur during the preparation of the forms of the financial statements. These errors are corrected as errors in primary accounting documents.

For example:

· if you forget to put blanks in the lines with no figures, you should put them.  

· if you forget to collect some figures in parenthesis, you should do it.

· if you find out that the total figures in the statements are wrong, cross out the wrong number and write down the right one near it.

Then write "alteration approved", put your signature and date of correction. Any other errors in the statements, not connected with errors in primary documents and ledgers, are corrected in the same way.

Correction of errors made in tax ledgers

The income tax amount for the reporting period is calculated on the basis of tax accounting data. All accounting information, necessary for the calculation of the income tax base, is recorded in tax ledgers.

The basis for tax accounting is the same primary documents which are used in accounting. So the errors in primary documents cause the distortion of both accounting and tax accounting data.

Apart from this, errors in tax accounting also occur during the tax ledger preparation, if the accountant inappropriately accounted for the organization income and expenses, or miscalculated other taxes (Single Social Tax (ESN), property tax, etc.). 

If in tax accounting was detected an error, the corrections should be made in the tax ledgers of the reporting period, when the error was made (Article  54 of the Tax Code of the RF). Note that the time of the error detection doesn't matter.

If the period of the error is impossible to identify, you should adjust the tax liabilities of the reporting period.

Changes and amendments to tax return

If the organization found errors in tax computations, it should present a revised tax return to the tax authorities.

A revised tax return consists of all data from the old tax return including changes and amendments.

· Revised tax returns are usually presented to tax bodies only for the last three calendar years of the organization activities (Article 87 of the Tax Code of the RF).

· The revised tax return should be prepared in accordance with the forms existed in the period, for which the tax is recalculated. 

· To make corrections to the tax return an application for changes and amendments to tax return is submitted. 

· The application and the revised tax return are filed in 2 copies, one for a tax officer, and one for the organization.

· The application is drawn up in a free format. However, it should contain the following data:

- tax body details (name and code);

- organization information (name, Tax ID (INN), registered address, contact telephone number),

- tax subject to the revision by the organization;

- timeframe for which the recalculation of tax liabilities is made due to the detected error;

- number and date of the payment document which served as a basis for payment of this tax deficiency, occurred as a result of the recalculation;

- signatures of the organization head and the chief accountant with printed full name.

If tax recalculation created tax overpayment, the organization should submit a request:

- to refund extra tax amount paid to budget; or

- to offset this amount against current debt on other taxes or against future payments.

The tax body makes a decision within five days after the receipt of the application from the organization. However, you should remember the offsetting restrictions stipulated in the Article 78 of the Tax Code of the RF:  the offset operation is possible only if the extra paid amount was charged to the same budget (non-budgetary fund) as the additional tax amount and penalty.

· It is possible to present revised tax return for one and the same reporting period more than one time.

When preparing the revised tax return you should put the number 3 in the field “Type of document”, and after slash – the number of the revised tax return for this reporting period. The first revised tax return will be numbered «3/1», the second - «3/2», etc.

· The order of revised tax returns presentation depends on the type of inappropriately charged tax.

Conventionally tax returns (tax calculations) can be divided into two types. The first type includes tax returns, prepared on a cumulative total basis from the year beginning. These tax returns and calculations are prepared for income tax, property tax, as well as for Single Social Tax (ESN), insurance contributions for compulsory pension insurance, single tax paid on conditions of the simplified tax system.

The second type includes tax returns prepared separately for each reporting period (month, quarter) during the whole year. Such calculations are made for VAT, excise taxes and unified tax on imputed income (ENVD).

1. Tax base is calculated separately for each reporting period

If the organization detected an error in tax calculations for the tax return presented separately for each reporting period, it should act in the following way.

An error of one reporting period, for example, 1Q does not affect the tax calculation in the subsequent reporting periods (in 2Q, 3Q and 4Q). Therefore it presents to the tax body the revised tax return or calculation only for the reporting period (quarter, month), when the error occurred.

2. Tax base is calculated on a cumulative total basis

The correction of errors in taxes calculated on a cumulative total basis is much more troublesome.

If the error occurred in 1Q of the last year or year before the last, then all subsequent tax returns will have to be changed up to the unfortunate year, because the error was repeated in tax returns for half a year, for 9 months and for a year. That’s why the organization has to present to the Tax Inspectorate revised tax returns or calculations for all reporting periods of the year of error.

The situation with tax return on property tax is even more complicated,  because the error made by the accountant may distort data not only for the previous and the current period. It may extend for several consecutive years. That’s why all property tax returns should be adjusted, starting from the period, when the error was made, and including the last tax return.

In the correction of errors in tax calculation for the current year the number of revised tax returns will depend on when the error occurred, and when it was detected.

· If the error occurred in 1Q of the current year and detected in 2Q, you should present to the Tax Inspectorate only additional calculation for 1Q.

· If the error occurred in 1Q of the current year and detected only after the year end, you should present to the Tax Inspectorate additional tax returns for 1Q, HY and 9 months.