How do you forecast prepaid expenses

4. Active accruals and deferrals

Paragraph 1 sentence 1 defines the prepaid expenses in the narrower sense. After that, expenses made are to be capitalized insofar as they represent expenses for a certain time after this day. There are expenditures in the case of the disposal of liquid funds, the increase in debts or the decrease in claims, as far as these are not settled (§ 98 No. 7 KommHV-Doppik).

The main applications for active deferred income in municipalities are the January remuneration for civil servants as well as advance payments of insurance premiums, newspaper purchase costs, rents, leases, vehicle taxes, maintenance contracts and the like.

According to Paragraph 1 Clause 2, the sales tax taken into account as an expense may be shown on down payments to be shown on the balance sheet date or openly deducted from inventories. This provision, taken from commercial law, is of little practical importance. In the case of municipalities, it can also only be used for commercial establishments.

If, for example, the municipality receives a down payment for a commercial type of business and pays this including the sales tax, the sales tax burden arises even before the service is provided with the receipt of the down payment. In order to post the sales tax liability, an expense account (account 5441) must be addressed to reduce the result. In this way, the income statement is inappropriately charged to reduce the result. In order to restore profit-neutrality, an active deferred income can be created. In this case, the municipality is therefore expressly given the right to vote. The use must be indicated in the appendix (see Section 86 (2) No. 2 KommHV-Doppik).

In addition, according to Sections 6.4.4 and, payments / grants that are connected with a consideration by the recipient in subsequent financial years but do not constitute an intangible asset are to be capitalized as prepaid expenses. Such cases are unlikely to occur in municipal practice. In an earlier draft version of the evaluation guidelines, an example was given of an operating grant granted in advance for a kindergarten (to a non-profit organization). This should cover a future forecast annual loss.

Posting example for a pro rata active accrual and deferral

The community receives on December 15. a vehicle tax assessment for a newly registered vehicle for the period 01.11. until October 31 of the following year. The tax liability is € 1,200. The tax is on January 16. due in the following year. The municipality makes use of the payment term.