Provision for closing and audit costs

What it means

A provision for closing and audit costs is a provision made at year end for costs that relate to the year being closed but are paid later. These are mainly preparing the financial statements, their audit by a statutory auditor, preparing the annual report and the tax return, and publishing them.

The work takes place in the following year, but its cause is closing the previous one. Under the matching principle, the cost belongs to the year for which the statements are prepared, and the provision ensures it is recorded there.

It is one of the few provisions that is tax-deductible when created. As a result, no difference arises between accounting and taxable profit, unlike with provisions for bonuses or litigation.

How it works in practice

The amount is estimated from the contract with the accounting firm and auditor, or from last year's actual costs adjusted for expected changes. If the books are kept in-house, the provision may include a share of personnel costs for closing work.

The following year, the provision is used when the invoice from the accounting firm or auditor arrives. If the invoice is higher or lower than the provision, the difference goes to expenses or income in the year the invoice is received.

For small companies with outsourced accounting, it is one of the few provisions that routinely appears in the financial statements. It is simple to create, but leaving it out distorts the result and may draw comments in an inspection.

What to watch out for

The provision may only cover costs related to the financial statements and tax return for the year in question. Ongoing monthly bookkeeping or advisory work does not belong in it; those are expensed as services as they are provided.

The amount should be reasonable. An inflated provision reduces the tax base without justification, and the tax authority may challenge it. Basing the estimate on contracted prices and previous invoices is wise.