Standards in practice: VAT and GRAP
One VAT balance is not enough: how municipalities should report VAT accruals and the SARS account
Most municipal statements show VAT as a single line. Under the payments basis there are three different things behind that line, and putting them together hides what each one is, what it is worth, and when it will turn into cash.
Open the statement of financial position of most municipalities and you will find a line called VAT payable, VAT receivable or, more honestly, VAT suspense. Behind that single number sit three balances that have nothing in common except the letters V, A and T. The first is the amount actually due to or from SARS on the last VAT return of the year. The second is output VAT on invoices the municipality has raised but the customer has not paid. The third is input VAT on invoices suppliers have raised but the municipality has not paid. Under the payments basis, which most municipalities use, the first is a real amount owed today, and the other two are not owed to anyone yet. Reporting them as one figure is convenient. It is also misleading, and it is one of the reasons VAT balances attract more audit adjustments than their size would suggest.
What the fact sheet says, and what it leaves open
The ASB Secretariat's Fact Sheet 11 on the classification of VAT is the only guidance most preparers have, so it is worth reading exactly. It says that the VAT charged to a customer is part of a contractual receivable and is dealt with under GRAP 104. It says the obligation to pay VAT to SARS arises from legislation, so the balance with SARS is a statutory receivable or payable and not a financial instrument. And for payments-basis vendors it says something that many municipalities have never applied: the VAT on uncollected debtors and unpaid creditors, which it calls the VAT accrual account, does not represent amounts to be received or paid, but amounts associated with transactions that are yet to be settled. Because there is no counterparty to settle with, the fact sheet says the requirements for set-off are not met and that separate presentation of the accrual debit and credit may be more appropriate.
Read critically, the fact sheet does three useful things and stops short of a fourth. It separates the SARS balance from the accruals. It tells you the accruals are not receivables or payables in the ordinary sense. It leans towards presenting the debit and credit sides separately. What it does not do is say how to measure the accruals, how to present them on the face of the statements, or what to disclose. It also carries a disclaimer that it has not been reviewed or approved by the Board. So a municipality that wants a defensible position has to build one from the Standards themselves, and disclose it.
Three balances, three different natures
The balance with SARS is the easiest. It is the net of output VAT collected and input VAT paid for the return periods not yet settled, and it is what the VAT201 says. It is a statutory receivable under GRAP 108 if SARS owes the municipality, and a statutory payable if the municipality owes SARS. It is measured at the amount that will be received or paid, it must reconcile to the returns, and it should be shown on its own line. It never belongs in the GRAP 104 financial instrument disclosures.
The output VAT accrual is different in kind. It is VAT on invoices to customers that the municipality will only owe SARS when the customer pays. It is not a liability under GRAP 19, because there is no present obligation until the cash arrives. Nor is it revenue, because the municipality is collecting it on behalf of SARS. It is a deferred amount, and its value depends entirely on the collectability of the debtors it sits on. If the expected credit loss model says 40 percent of the aged book will never be collected, then 40 percent of the output VAT on that book will never become payable. A municipality that impairs the debtors under GRAP 104 but carries the full output accrual at gross is showing a liability-like balance for VAT it will never owe, and overstating its obligations by exactly that amount.
The input VAT accrual is the mirror image on a smaller scale. It is VAT on supplier invoices that the municipality will only be able to claim from SARS once it pays the supplier. It is not a receivable from SARS today. It is a deferred input credit, and its value depends on the municipality actually settling the creditors it relates to. For a municipality with long-outstanding creditors, or with unpaid Eskom and water board accounts, this accrual can be large and it can sit unclaimed for years. It also carries an apportionment question that is often ignored: input VAT on mixed supplies is only partly claimable, and the non-claimable portion is a cost, not an accrual.
How the balances are commonly misreported
The first habit is netting everything into one line. The output accrual, the input accrual and the SARS balance are added together and shown as VAT payable. A reader cannot tell how much is owed to SARS today, how much depends on debtors paying, and how much depends on the municipality paying its suppliers. The fact sheet's point about set-off applies here directly: these are not amounts with the same counterparty, and offsetting them has no basis in GRAP 1.
The second habit is calling the whole thing VAT suspense. A suspense account is a temporary holding place for unallocated items. The output accrual is not unallocated; it is a known, calculable amount with a known basis. Labelling it suspense signals to an auditor that the municipality does not know what it is, and invites the question of why it has not been cleared.
The third habit is carrying the output accrual at gross year after year while the debtors underneath it are impaired and written off. The accrual then grows into a number that no longer relates to anything in the debtors book, and the year-end reconciliation between VAT on outstanding debtors and the accrual account fails. When debt is written off under the credit control policy, the related output accrual should be reversed in the same period, and when debt is impaired, the accrual should be measured on the same collection assumptions as the allowance.
The fourth habit is a classification error in the notes. The SARS balance is listed under financial instruments and included in the GRAP 104 credit risk and liquidity disclosures, while the accruals are left out of every note. Neither is a financial instrument. The SARS balance belongs in the statutory receivables or payables note, and the accruals deserve a note of their own.
The fifth habit is in the cash flow statement. Cash paid to SARS is an operating outflow and should be shown as such. Some municipalities net it against receipts from customers, which understates both the receipts and the payments, and makes the statement impossible to reconcile to the VAT returns.
The three-way presentation that survives audit
A presentation that answers the auditor's questions before they are asked has three separate elements, each with its own line and its own explanation.
First, the VAT balance with SARS, shown as a statutory receivable or a statutory payable according to the sign of the last return, with the accounting policy stating that the municipality accounts for VAT on the payments basis. The note reconciles the balance to the VAT returns for the periods not yet settled.
Second, the output VAT accrual, shown separately as a deferred amount payable to SARS on collection of the related consumer debtors, not netted against the receivable and not netted against the input accrual. The note states the basis of measurement, which in our approach follows the expected collectability of the underlying debtors, and shows the movement for the year: opening balance, VAT on billings, VAT on receipts transferred to the SARS account, VAT reversed on write-offs, and closing balance.
Third, the input VAT accrual, shown separately as a deferred amount claimable from SARS on payment of the related creditors, with the same style of movement note and a statement of how apportionment has been dealt with.
The three lines reconcile to each other and to the ledger. The output accrual agrees to the VAT on outstanding debtors at year end, the input accrual agrees to the VAT on outstanding creditors, and the SARS balance agrees to the returns. If any one of the three cannot be tied to its source, that is the finding, and it will be raised whether or not the presentation is right.
Why this is worth the effort
The amounts are not small. For a municipality with a large aged debtors book, the output accrual can be tens of millions of rand, and the difference between carrying it at gross and carrying it at the collectable amount is material on its own. For a municipality behind on its bulk accounts, the input accrual is the VAT it could recover if it paid, which is useful information for council and for the mid-year assessment. Presenting the three balances separately turns a number nobody reads into information somebody can act on, and it removes a standing audit finding at the same time.
Year-end checks
- Reconcile the SARS balance to the VAT returns for every open period, and agree it to the ledger.
- Reconcile the output accrual to the VAT on outstanding consumer debtors at year end, and confirm the write-off reversals were processed.
- Reconcile the input accrual to the VAT on outstanding creditors, net of the non-claimable apportioned portion.
- Confirm the SARS balance is presented as a statutory receivable or payable and is not in the financial instrument disclosures.
- Present the two accruals on separate lines with a movement note, and state the measurement basis in the accounting policy.
- Check that VAT paid to SARS is shown gross as an operating outflow in the cash flow statement.
Where we help. Ambition Partners Advisory prepares and reviews GRAP-compliant annual financial statements for municipalities and public entities, including the VAT reconciliations and notes described here. Read about our GRAP annual financial statements service or message us on WhatsApp.
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