Financial reporting - 5 things to consider with expenses
For many companies, staff expenses aren’t a material cost and don’t cause a problem at end-of-year but for others, especially where they have a large number of field service engineers or sales reps, out of pocket expenses are definitely material.
The problem is that in these cases getting things right is really important and, without a good expenses system, this can actually take a lot of time and effort.
In this article, we’re looking at five issues that staff expenses can cause for financial accounting and some solutions that will help.
Getting people to claim their expenses on time can be a nightmare and often you can find that staff are chasing errant directors around for months’ worth of claims and receipts. The problem is of course that you have a finite deadline to get information in for the end of year accounts so you may have a problem, especially if the numbers are material.
There are two options here:
Have an expenses system that encourages and rewards timely claims and pays out quickly.
Assess the size of the problem and make an end of year accrual. Admittedly it isn’t particularly elegant but it will at least give a true and fair picture.
The best advice of course is to make sure that you have an excellent expenses system, such as Access Expense, and you implement effective controls and enforce them. That way you can be sure that your monthly management accounts will also be correct and that your end of year runs more smoothly than ever.
2. Balance sheet loans
The basic premise of expenses is that the employee pays for a business expense and then claims it back from the company at a later date. This is fine if you only have the odd parking ticket or a bit of mileage to claim for, but where expenses are heavier then it can cause people to be seriously short on cash. For companies that have staff who are likely to pay for a lot of out of pocket expenses, providing an advance on these is a practical solution.
Expenses advances fall into a grey area between an advance payment and an employee loan, but as they are usually settled (by the employee incurring actual expenses) within a month, then there is no tax implication. However, it is important to make sure that you have an accurate record of these and that they are categorised as a balance sheet asset. After all, you are expecting that the employee will pay back the advance when they leave the business.
You can do this in a simple Excel or Google sheet but if you do, then it is important to make sure that you keep it up to date and reconcile it with your balance sheet on at least a quarterly, or better still, monthly basis.
It should go without saying that any finance team worth its salt would be producing accurate numbers but when it comes to expenses that is often not the case.
Part of this comes down to controls; either they are not in place or they are not enforced meaning that claims aren’t properly checked and incorrect payments are made. Part of it comes down to systems. Often the system isn’t user friendly enough or it actually encourages inaccurate reporting.
For some companies that pay very few staff expenses this won’t actually be material but for others it will form a large part of their expense lines and should be properly reported.
Putting in place effective controls and communicating to employees (and of course directors) about the importance of getting it right will certainly help here.
One of the most common errors in expenses reporting is that of categorisation. Quite simply things can and do get coded to the wrong General Ledger accounts. Now in many cases this doesn’t matter, after all, will the world stop revolving if one month you code phone lines to broadband expenses?
However, in other cases, it can be a material misstatement.
An example of this would be where a director or senior manager pays for capital equipment using their credit card and then claims it back using the expenses process. Often you find that this is the easiest way to make the payment or that it becomes a habit that the directors simply can’t break! But of course coding these to a catchall general ledger account of ‘staff expenses’ would be incorrect as the likelihood is that they will be balance sheet items.
This is why it is really important to make sure you have a system that allows (and is set up for) proper categorisation of expenses into types and that you can then review, amend and report on these.
5. Directors emoluments
There is a statutory requirement to disclose payments made to directors under FRS102 and for charities, payments made to directors and trustees are also required to be noted in line with SORPS FRSSE.
The overriding principle here is openness and transparency and these requirements were brought in to give stakeholders full sight of what those entrusted with running an organisation were being paid. In many cases, the only payments made to directors or trustees will be in the form of salary, bonus and pensions but we do have to be careful with expenses.
Often businesses will reimburse ‘expenses’ to the directors that aren’t really expenses at all. For example they may agree to put in a home phone line for the director and suggest that they claim back the rental costs in their expenses. In terms of the business this is a perfectly reasonable cost but from HMRCs point of view this is a Benefit in Kind (BIK) and should be taxed as such.
This means that when you are making up your directors emoluments notes for the annual accounts you do need to be aware of any payments that may have been agreed with the directors that are actually a form of disguised salary or BIK.
BIKs do need to be included in the directors emoluments or trustee payments notes. Of course you will also need to be including these on your P11d return at the end of the tax year and pay over any NICs and tax that results.
The best piece of advice here is to review any expenses submission by directors or trustees and mark up suspect items as you go along. It is much easier to do this when you are paying the claim rather than waiting to the end of the year and then sifting through 12 months of claims trying to work out what is what.
Why struggle with financial reporting of expenses?
In the majority of cases the problems we have identified can be addressed using three things; controls, communication and a great expenses system.
Every company should have good controls for staff expenses and it should go without saying that these should be practical when in use but should also be rigorously enforced. Communicating the need for these controls, and letting people know what they can and can’t claim for, how they should be paying for things and when there will be a tax implication is vital.
Finally, having a system that automatically enforces your controls and makes categorisation and reporting of expenses simple, efficient, and fast will make a huge difference to your end of year.