As it is known, the subject to the income tax is the financial result before taxation, determined by the rules of accounting and adjusted for tax differences. In order to correctly determine the financial result, the income tax payers must comply with all accounting principles, in particular the principle of accrual and compliance of income and expenditure. It is possible to comply with these, creating at the company, in particular, reserves of leaves. We remind you the general rules of forming leave reserves.
Why it is important to create leave reserves
Only after 01.01.2015, when the basis for determining taxable income was a financial result before taxation, calculated under the accounting rules in accordance with National Accounting Standards or IFRS, companies began to think about the need to create a leave reserve (para. 134.1.1 of TCU).
It wasn’t often mentioned until now. As a matter of fact, all the leave allowances are still included in the payroll budges according to the Guidelines on wage statistics, approved by the order of the State Statistics Committee of Ukraine dated January 13, 2004 No. 5. At the time of leave allowances payment, their size may differ somewhat from what was in the period for which this leave is granted (the average earnings on the basis of which the leave allowances to be calculated may vary), but this difference will not be significant.
At the same time, such an approach is not correct. If the company does not create leva reserves, it can lead to serious mistakes. Therefore, in some months of the year (or in certain years), due to the uncreated reserve, the cost will be overestimated.
For example, this happens when:
1) employees massively take leaves in one period (summer), during which their duties are performed by other workers, and they are paid for that. At the expense of spending on the leaves, the size of accounting costs increases in the period of the leaves, which leads to an increase in the cost of production (works and services) of this period. Although in fact some of these costs fall on past periods;
2) employees did not use leaves (all or part of it) for the relevant year. The days of such leave (its part) will be postponed to subsequent years, or the company will compensate it to the employee at the time of dismissal in the future.
If in the future an employee begins to take leave days allocated to him/her, then the payment of leave allowances of past years (or their compensation) at one point in the whole amount accrued will be included in the cost of the current reporting period. As a result, in one period, the costs will be lowered (in the years on which unused leaves fall), in the other - overestimated (in the period of leave allowances payment for past periods).
In order to avoid it, the National Accounting Standards provide for the creation of leaves reserve within a year, which will distribute costs between periods and not distort information. This is emphasized by the Ministry of Finance in its letter dated November 10, 2006 No. 31-34000-207-10/23936.
Another reason for creating of leaves reserve is the reflection on reporting date of the company’s obligation to employees to pay for unused leave days.
Provisions of para. 13 of Accounting Standards 11 “Obligations” and para. 7 of Accounting Standards 26 “Payments to employees” require to create the leaves reserve. Consequently, the leaves reserve must be necessarily created by almost all companies. The Ministry of Finance also insists on this (letters dated January 23, 2014, No. 31-08410-07-10/1550, dated August 20, 2009 No. 31-34000-20-5/22614 and No. 31-34000-20-25/12321).
Who is not required to create the leaves reserve
Only the following are not required to create the leave reserve (para.8 of sec. I of Accounting Standards 25 “Financial Report of a Small Business Entity”):
1) legal entities – the unified tax payers of groups 3 and 4;
2) micro enterprises, that is, enterprises which comply with two of the following three requirements:
- book value of their assets - up to 350 thousand euros;
- net income from the sale of products (goods, works, services) - up to 700 thousand euros;
- average number of employees - up to 10 people.
At the same time, such companies are not forbidden to create the eaves reserve. They are given the right to choose: to create or not. Whatever decision they make, it should be specified in the order on the accounting policy.
