By Frank Obaro
Different and sometimes challenging business decisions can force companies to change their accounting dates. Sometimes regulatory pronouncements such as that issued to banks post consolidation to have a uniform year end was anevent which saw all banks in one fell swoop change their different accounting dates to December. While some companies have adopted calendar years, some others use fiscal years, which method is adopted is subject to tax implications. Whereas in the US the Internal Revenue Service (IRS) must give permission for companies to change their accounting dates especially to tackle tax avoidance, and may take as much as 10 years to effect another change in some cases,it is not yet so in Nigeria, an area which should be addressed.
However, a lot of companies still do not know that there are tax implications to change of dates in their accounting period beyond the approval they get from their shareholders to do so. The FIRS being aware of different methods applied by tax consultants and tax officers in the treatment of changes in accounting dates, with each method yielding different results in under-assessment or incorrect assessments levied on taxpayers issued a circular in February 2006 as a guide to officers who have responsibility for filing and assessment duties, and those who may be required, as a matter of duty to carry out preliminary reviews on tax returns submitted by companies as well as officers vested with audit responsibilities, who from time to time will come across cases of change in accounting dates in the course of their audit assignment.
Changes in Accounting Dates
There are a number of reasons why a business may wish to change its accounting date and these reasons may include:
i) The need to synchronize the accounting date of a subsidiary with that of the holding company.
ii) The convenience of stock taking at a particular period of the year.
iii) A business may take over the operation of another and as a result wish to change the accounting date of the company taken over to that of its own.
Where a change in accounting date takes place, be it a sole trader, partnership or a limited liability company, the provisions of section 29(4) of the CAP 21 LFN of 2004 will apply. The Act provides that the Tax Authorities have the power to decide the basis of computing the tax liability for the year in which the change occurs and the two following years of assessment.
As should be expected, the tax official will base his decision on the best advantage to the tax authority. It is important to note that the three relevant years to be considered are:
i) The assessment year in which the accounting date becomes different from the date of the earlier years. This is known as the year when the change occurred.
ii) The next two years of assessment following that in which the change occurred.
In practice, calculations are made on both the old and new dates. The greater of these two aggregates will be the likely choice of the revenue authority.
Years Involved in the Tax Computations
Whenever a request for a change of accounting date has been approved, the company making the change shall be assessed to tax through a special process of determining the basis of assessment. This process requires computations for three relevant years. Where the year of cessation is involved (ultimate year) in these three relevant years, the request for a change shall not be approved. However, where the year immediately before the year of cessation (penultimate year) is involved in these three relevant years, the request may be approved by the FIRS, depending on other evidences before it.
Assessment Procedure on Change of Accounting Date
For an on-going business, current assessment is based on preceding year basis. But whenever there is a change of accounting date, a normal accounting period may not have ended in the year of change. This is so because when there is a change of accounting date, it is either that an account is prepared for more than twelve months to the new accounting date or even less than twelve months to the new accounting year end. The FIRS will often adopt the following procedures to determine the assessments for the three relevant years:
i) Identifying the first year in which the business has failed to make up the accounts to its usual accounting date.
ii) Identifying the two years immediately following the year of failure.
iii) Computing assessable profit for the three relevant years based on the old accounting date (on preceding year basis).
iv) Computing assessable profit for the three relevant years based on the new accounting date (on preceding year basis).
v) Adding up the assessable profits for the three years in (iii) and (iv) above separately.
vi) Selecting the higher of the two profits added up in (v) above.
Julius Blake Nigeria Limited has been in business for many years. It has for a long time prepared its annual accounts up to 30th April. In 1996, it decided to change its accounting date to 31st October. Available figures showed its adjusted profits as follows: N (No. of Months)Year ended 30/4/1995 450,000 12Period ended 31/10/1996 830,000 18Year ended 31/10/1997 590,000 12Year ended 31/10/1998 600,000 12You are required to compute the correct assessments for all the relevant years in the light of the change in accounting date. SolutionJULIUS BLAKE NIGERIA LIMITEDCOMPUTATION OF ASSESSMENT Note: The last account submitted before the change was 30th April 1995. Therefore, the year of change is 1996. The three relevant years are therefore 1996, 1997 and 1998.a) Original Assessments (Based on old Accounting date of 30th April) Year of Assessment. Basis Period Assessment 1996 P:Y.B(1/5/94-30/4/95) N450,000 1997 1/5/95 – 30/4/95 12/18 x 830,000 N553,333 1998 1/5/96 – 30/4/97 (6/18 x 830,000) + (6/12 x 590,000) N571,667b) Assessment Based on 31st October Year of Assessment. Basis Period Assessment 1996 1/11/94 – 31/10/95 (1/11/94-30/4/95) + (1/5/95-31/10/95) (6/12 x 450,000) + 6/18 x 830,000) N501,667 1997 P.Y.B. to 31/10/96 1/11/95 – 31/10/96 12/18 x 830,000 N553,333 1998 P.Y.B. to 31/10/97 N590,000c) Summary of Assessments Year Old date of new date of 30th April 31st October N N 1996 450,000 501,667 1997 553,333 553,333 1998 571,667 590,000 1,575,000 1,645,000 Conclusion:The Revenue will choose to raise assessments on the basis of the new accounting date as it results in greater assessment.