ACCRUED LIABILITIES POLICY

Table of Contents
OVERVIEW.............................................................................................................................................................. 3
ACCRUED LIABILITIES POLICY: SAMPLE 1.......................................................................................................... 4
ACCRUED LIABILITIES POLICY: SAMPLE 2.......................................................................................................... 7
ACCRUED LIABILITIES POLICY: SAMPLE 3.......................................................................................................... 8
ACCRUED LIABILITIES POLICY: SAMPLE 4........................................................................................................ 10
ACCRUED LIABILITIES POLICY: SAMPLE 5........................................................................................................ 12

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 OVERVIEW

Documented policies and procedures are integral to efficient and effective company operations. They are also key
to the company’s internal controls environment.

A “policy” is any rule or set that requires or guides action. A policy must be designed to promote the conduct of
authorized activities in an effective, efficient and economical manner and provide a satisfactory degree of
assurance that the company's resources are suitably safeguarded. Also, any policy formulated must conform to
applicable laws and regulations and be consistent with the mission and philosophy of the company.

Procedures are the methods employed to carry out activities in conformity with prescribed policies. To promote
maximum efficiency and economy, prescribed procedures must be as simple as possible and be distinct,
consistent and consistent.

All teams within a company that follow standardized procedures for operations related to specific policies
established by the company must establish a formalized approach and practice. A leading practice is to develop a
policy to create guidelines for formulating, finalizing and maintaining the company’s formal policies and practices.

This tool contains three sample policies that establish processes where the accrual processes ensure that all
expenses related to the month are properly included in the company’s financial statements. The purpose of the
monthly accrual process is to allocate expenses to the proper accounting period and match expenses with related
revenues.

In these policies, accrued liabilities must be established consistently in each accounting period for the portion of
known or estimated future expenditures, which may be properly allocable to current-period activities but may still
need to be formally payable. Accrual balances and provisions about actual expenses incurred and expenditures
anticipated must be evaluated monthly to avoid distorting adjustments at year-end. Accruals must not be recorded
for general contingencies for unknown future expenditures.

This document can be used as a sample policy. The KnowledgeLeader team will periodically update this
document with new content. Organizations must select, update and modify the content included in this
document to ensure that it reflects business operations.

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 ACCRUED LIABILITIES POLICY: SAMPLE 1

Prepared By:

Approved By:

Revision Date:

Effective Date:

PURPOSE

The purpose of this policy is to provide Company X guidance about the definition of and responsibility for items
included in the accrued liabilities and other accounts.

The purpose of monthly accrual processes is to allocate expenses to the proper accounting period and match
expenses with related revenues. At the close of each month, accrual processes ensure that all expenses related
to that month are appropriately included in the company’s financial statements. Accrual processes must be
completed promptly and accurately and comply with applicable financial and accounting standards.

SCOPE

The intended use of this policy is for domestic offices and subsidiaries of Company X.

POLICY

This policy establishes the standards and guidelines for ensuring that Company X accounts for monthly accruals
comply with management’s objectives and generally accepted accounting principles (GAAPs).

All expenses must be captured to the greatest degree practical in the period in which they are incurred, per the
policy of Company X.

PROCEDURES

Company X must accrue for the following items:

• Accounts payable
• Payroll
• Redeployment reserves
• Product upgrade reserves
• Product performance liability reserves
• Product warranty reserves
• Construction-in-process reserves
• Reserves for sales and marketing

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• Any other material obligation that is a liability of Company X

The accrual process must be accomplished promptly and accurately and comply with all applicable financial and
accounting standards. Obligations that accrue over time must be recorded over the accounting period
systematically and rationally. Obligations that accrue during an event must be recorded at the time of the event.

Consider the following factors when determining the time of recording for payables and accrued liabilities:
• Ownership may be passed to Company X through receipt of goods or equipment. The expense must have
been incurred during the month being closed, meaning the product or service must have been received on or
before the last day of the month to qualify as an expense. Even though an expense may have been initially
budgeted in the month, it does not qualify for accrual unless the company received the product or service.
• The dates of titles may be passed from the seller to Company X.
• A significant risk of return may not exist in the product on the received date.
• All outstanding liabilities may accrue.
• All accruals may be reversed automatically in the next month and re-accrued the following month, as needed.

In addition to the above factors, the following must also be considered when determining the time of recording:
• If the product is received on consignment, do not record until the title passes.
• For amounts due under contracts, including retainages, items must be recorded as they become billable.
• Services must be recorded and charged to expenses or capitalized, as appropriate, as the services are
performed.
• Dividends, interest and sales tax must be recorded when the obligation arises or when corresponding
revenues are recorded.
• Payroll taxes withheld and other payroll withholdings must be recorded when the related payroll is recorded.
• If payment is due before the performance, the amount must be accrued to prepaid expenses.

Office accounting personnel are responsible for having procedures in place to estimate losses and documentation
to support accrued liabilities. The following sets forth a representative list of items to include in accrued liabilities.
(Note: This list is not all-inclusive.)
• Workers’ Compensation: This includes liability for workers’ compensation and public liability insurance.
• Commission External: This includes liability for commissions due to third parties.
• Utilities: This liability includes gas, telephone, electricity, water, etc.
• Professional Fees: This liability includes audit, legal, consulting and other professional fees.
• Legal Contingencies: This includes liability for pending or threatened litigation and actual or possible
settlement. Legal contingencies must be developed in conjunction with the company’s legal department.
• Restructuring: This includes liability for restructuring operations, which includes salary, wages, benefits and
other severance costs.
• Contracts: For amounts due under contracts, including retainages, items must be recorded as they become
billable.
• Freight: This includes liability for shipment of goods – inventory or systems, products, or parts.
• Travel and Entertainment: This includes liability for payment of approved employee expense accounts.
• Bonuses: This includes liability for payment of approved employee bonuses.
• Other: This includes any other accrued liabilities not mentioned above.

Payables and accrued liabilities must be recorded at face value plus or minus any interest premium, discount and
other appropriate adjustments. The payable amount can be determined from the billing received and must be
verified against purchase orders/requisitions, contract terms or other appropriate documents before recording the

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liability. The recorded value must be based on the best available estimates when actual values are unavailable.
Estimates must be based on current market price, experience/history and comparables.

Corporate accounting personnel is responsible for performing an overall review for unrecorded accrued liabilities
three to five business days after accounts payable close each month to help ensure that all expenses are
appropriately captured.

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 ACCRUED LIABILITIES POLICY: SAMPLE 2

Prepared By:

Approved By:

Revision Date:

Effective Date:

SCOPE

This policy applies to all units of Company X.

POLICY

• Accrued liabilities must be established consistently in each accounting period for the portion of known or
estimated future expenditures, which may be properly allocable to current-period activities but may not be
formally payable yet.
• Amounts expected to be payable within one year must be recorded in the current accounts. Amounts expected
to be payable after one year must be set up as long-term liabilities.
• Appropriate account titles must be used when recording accrued liabilities, such as wages payable, estimated
property taxes payable and interest payable.
• Accrual balances and provisions about actual expenses incurred and expenditures anticipated must be
evaluated monthly to avoid distorting adjustments at year-end.
• Accruals for general contingencies must not be recorded for unknown future expenditures.

RESPONSIBILITY

The corporate controller is responsible for establishing and interpreting policies about recording and reporting
accrued liabilities. The chief operating officer of each unit and all managers within Company X are responsible for
implementing and administrating this policy within their respective organizations.

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 ACCRUED LIABILITIES POLICY: SAMPLE 3

Prepared By:

Approved By:

Revision Date:

Effective Date:

PURPOSE

The purpose of this policy is to provide guidelines for proper accounting for Company ABC’s accrued liabilities.

The purpose of monthly accrual procedures is to allocate expenses to the proper accounting period and match
expenses with related revenues. At the close of each month, accrual procedures are needed to ensure that all
expenses related to that month are properly included in the company’s financial statements.

SCOPE

All accrued liabilities are related to transactional and financial reporting processes.

REFERENCES

Accrued Liabilities Accounting Standard

RESPONSIBILITIES

• The evaluation of accounting for accrued liabilities is the responsibility of the office of the VP – corporate
controller.
• The accounting for accrued liabilities will be reported to the CFO and the disclosure committee and approved
via the quarterly disclosure committee review meeting.

DEFINITIONS

N/A

BACKGROUND
N/A

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 REQUIREMENTS AND GUIDELINES

• Recording of accruals
− When determining what accruals should be made, the following should be considered:
◦ Whether risks of ownership have passed to Company ABC through the receipt of goods or equipment
should be considered.
◦ The date the title passes from the seller to Company ABC should be considered.
◦ On the date the product is received, the product is fully functional, and no significant risk of return exists.
◦ The expense must have been incurred during the month being closed; the product or service must have
been received on or before the last day of the month to qualify as an expense. Even though an expense
may have originally been budgeted in the month, it does not qualify for accrual unless the company
received the product or service.
◦ The threshold for recording accruals from a materiality standpoint. Only expenses greater than $____
will be accrued.
◦ Certain accruals will be reversed automatically in the next month. Note that the company does use
nonreversing accruals.
◦ When recording accrued liabilities, using appropriate account titles, such as wages payable, estimated
property taxes payable and interest payable, is especially important.
◦ Accrual balances and provisions should be evaluated monthly in relation to actual expenses incurred
and expenditures anticipated to avoid distorting adjustments at year-end.
− In addition to the above factors, the following should also be considered when determining the time of
recording:
◦ If the product is received on consignment, do not record it until the title passes.
◦ For amounts due under contracts, including retainages, items must be recorded as they become billable.
◦ Services must be recorded and charged to expenses or capitalized, as appropriate, as the services are
performed.
◦ Sales tax must be recorded when corresponding revenues are recorded.
◦ Payroll taxes withheld must be recorded at the time of the related payroll.
◦ Other payroll withholding must be recorded when the related payroll is recorded.
− The recorded value should be based on the best available estimates when actual values are unavailable.
Estimates should be based on current market price, history and comparables.
• Validation of Completeness of Accruals
− Accounts payable prepares the on-hold report and sends it to the purchasing group.
− Account coding for invalid POs is performed.
− Accounts payable forwards the on-hold report to plants, capital and logistics for confirmation.
◦ It is confirmed that accruals posted by accounts payable are appropriate and the invoices will not be
accrued at the plant level.

MANAGEMENT SYSTEMS

• Internal Audit: This document must be audited for internal auditing of the management systems.
• Training Requirements: N/A

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 ACCRUED LIABILITIES POLICY: SAMPLE 4

PURPOSE

The purpose is to provide (Company) with guidance on the definition of and responsibility for items included in the
accrued liabilities other account.

The purpose of monthly accrual processes is to allocate expenses to the proper accounting period and match
expenses with related revenues. At the close of each month, accrual processes ensure that all expenses related
to that month are properly included in the company’s financial statements.

OWNER

The intended use of this policy is for the accounting department and subsidiaries of (Company). The maintenance
of this policy is the responsibility of the corporate controller.

SCOPE

This policy establishes the standards and guidelines for ensuring that Company XYZ accounts for monthly
accruals in compliance with management’s objectives and GAAPs.

Company XYZ's policy is that all expenses must be captured to the greatest degree practical in the period they
are incurred.

POLICY

Accrual must be accomplished promptly and accurately and comply with all applicable financial and accounting
standards. Obligations that accrue over time must be recorded over the accounting period systematically and
rationally. Obligations that accrue when an event occurs should be recorded at the time of the event.
• The factors to be considered in determining the time of recording for payables and accrued liabilities include:
− Risks of ownership passed to (Company) through the receipt of goods or equipment. The expense must
have been incurred during the month being closed; the product or service must have been received on or
before the last day of the month to qualify as an expense. Even though an expense may have originally
been budgeted in the month, it does not qualify for accrual unless the company received the product or
service.
− The date that the title passes from the seller to (Company).
− The date that the product is received and a significant risk of return do not exist.
− All outstanding liabilities will be accrued.
− All accruals will be reversed automatically in the next month and re-accrued the following month, as
needed.
• In addition to the above factors, the following should also be followed in determining the time of recording:
− For amounts due under contracts, including retainages, items must be recorded as they become billable.
− Services must be recorded and charged to expenses or capitalized, as appropriate, as the services are
performed.
− Interest must be recorded in the period the obligation arises.

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 − If payment is due prior to the performance, the amount should be accrued to prepaid expenses.
• Office accounting personnel are responsible for having procedures in place to estimate losses and
documentation to support accrued liabilities. The following sets forth a representative listing of items that must
be included in accrued liabilities (Note: This list is not all-inclusive.):
− Capital Projects: This liability includes costs incurred but not yet invoiced.
− Utilities: This liability includes gas, telephone, electricity, water, etc.
− Professional Fees: This liability includes audit, legal, consulting and other professional fees.
− Legal Fees and Contingencies: This liability includes pending or threatened actual or settlement litigation.
Legal contingencies should be developed in conjunction with the company’s legal department.
− Bonuses: This liability includes approved employee bonus payments.
− Vacation: This liability includes days earned but not yet used or recorded.
− Other: This includes any other accrued liabilities not mentioned above.

The amount can be determined from the billing received and should be verified against purchase
orders/requisitions, contract terms or any other appropriate documents prior to recording the liability. The
recorded value should be based on the best available estimates when actual values are unavailable. Estimates
should be based on current market price, experience/history and comparables.

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 ACCRUED LIABILITIES POLICY: SAMPLE 5

Prepared By:

Approved By:

Revision Date:

Effective Date:

PURPOSE

The purpose is to establish a policy and set forth the appropriate guidelines for accounting for accruals.

POLICY

• It is the policy of ABC Company that all expenses must be captured to the greatest degree practical in the
period that they are incurred. To this end, ABC Company must accrue for accounts payable, payroll,
redeployment reserves, product upgrade reserves, product performance liability reserves, product warranty
reserves, construction in process reserves, and reserves for sales and marketing. The accrual process must
be accomplished promptly and accurately and must comply with all applicable financial and accounting
standards. Obligations that accrue over time must be recorded over the accounting period systematically and
rationally. Obligations that accrue when an event occurs should be recorded at the time of the event.
• The factors to be considered in determining the time of recording for payables and accrued liabilities include:
− Risks of ownership have passed to ABC Company through the receipt of goods or equipment.
− The date that the title passes from the seller to ABC Company.
− On the date the product is received, the product is fully functional, and no significant risk of return exists.
• In addition to the above factors, the following should be followed in determining the recording time.
− If the product is received on consignment, do not record until the title passes.
− For amounts due under contracts, including retainages, items must be recorded as they become billable.
− Services must be recorded and charged to expenses, or capitalized, as appropriate, as the services are
performed.
− Dividends, interest and sales tax, must be recorded when corresponding revenues are recorded.
− Payroll taxes withheld must be recorded at the time of the related payroll.
− Other payroll withholding must be recorded when the related payroll is recorded.
− If payment is due prior to the performance, the amount must be accrued to prepaid expenses.
• Payables and accrued liabilities must be recorded at face value plus or minus any interest premium, discount
or other appropriate adjustments. The payable amount can be determined from the billing received and should
be verified against purchase orders/requisitions, contract terms or any other appropriate documents prior to
recording liability. The recorded value should be based on the best available estimates when actual values are
unavailable. Estimates should be based on current market price, history and comparables.

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