Question :

 Should an accrual or provision be recognised for audit fees in the financial statements that are presently being audited when none of the audit work has been performed by year-end?

Answer : (Source SAICA)

Please note: There are two different views about this in practice. View 1: In terms of IAS 37(AC 130) Provisions, Contingent Liabilities and Contingent Assets, a liability is a present obligation of the entity arising from past events. An obligation is a duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable due to a statutory requirement. A company requires an audit in terms of the Companies Act number 61 of 1973 as amended. Having operated during a financial year (past events) imposes an obligation to have an audit performed. Audit fees should be accrued for by an entity that is statutorily required to have an audit performed. View 2: Another interpretation is that no provision should be recognised for any work that has not yet been performed at the reporting date. The reason for this is that IAS 37(AC 130) Provisions, Contingent Liabilities and Contingent Assets, requires (amongst other things) that there is an obligation already in existence at the reporting date that has arisen as a result of the past event. Until such time as the audit work is performed, there is no past event. In fact, it is an executory contract which is normally excluded from the scope of IAS 37(AC 130). IAS 37(AC 130) defines this as follows: "Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent. This Standard does not apply to executory contracts unless they are onerous". The Framework also refers to a present obligation and as a result of a past event, and therefore, for the reasons above, it is not appropriate to recognise such a provision. However, in practice such provisions are likely to immaterial (particularly as the movement therein is the amount that should be considered) and therefore some people do recognise the provision on the basis that standards do not apply to immaterial items. If this is the case, it could be acceptable, provided the non-compliance is reflected on the schedule of unadjusted differences.