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Treatment of refund received due to settlement

Hi all, I have a client who filed a claim for refund with the city disputing that the city over assessed them on business professional and occupational license fees and taxes (BPOL taxes) in prior years. The city has agreed (agreement signed in Dec. 2015) to settle with my client and is refunding them all overpaid BPOLE taxes and fees for 2012, 2013, 2014, and 2015 including interest. As a result, my client has accrued the refund as of 12/31/2015 and per the agreement the city will refund my client 12/31/16. My question to all is what is the proper accounting treatment for the refund. The consensus seems to be that full amount should be recognized in 2015 as a credit to operating expense (where the BPOLE tax is typically recorded) with the interest portion recorded to interest income. Any help with this topic would be appreciated. Please site any authoritative literature if possible and preferably ASC, Regards, M

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

If you signed the agreement in 2015, I agree, the income is in 2015.

However, if from the time you signed the agreement, recorded the accrued interest (to 12/31) and the time you received the check more interest is accrued, than that interest is 2016 income.

Nick Sinigaglia
Title: SVP
Company: OnDeck
(SVP, OnDeck) |

I'm not sure of the authoritative guidance, or if there is any specific to this matter. I think the guidance would be the general definitions of revenue and expense. The refund is not revenue as it wouldn't meet the criteria. General rule is that the "reversal" goes through the same line item as the original entry. In this case, you recorded expenses that didn't exist, so those expenses need to be undone through that same line item. I agree that the interest would be income. As far as the materiality of the multiple years, I assume they are immaterial individually and in the aggregate. If you are an SEC registrant, look at SAB 99 and SAB 108 and use the Iron Curtain and the Rollover methods to gauge materiality.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

To record it as a reversal of the same expense line would misstate the expense for the current year.

To place the payment in other income/expense would take the refund out of the normal operating financial.

In either event, a Note to the Financials would be warranted.

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