FRCN Revokes Requirement of Approval for Financial Transactions

Financial Reporting Council of Nigeria (FRCN) has, issued a public notice which revoked its Rule 4, requiring regulatory approval for events/transactions having financial reporting implications prior to recognising same in the financial statements.

By this, companies would now be able to accrue for expenses incurred in respect of transactions that are yet to be registered or approved by the relevant statutory or regulatory body.

FRCN is the regulatory body responsible for supervising how financial transactions are reported in the audited financial statements.

In 2016, the FRCN issued Rule 4, which mandated business entities to obtain relevant regulatory authority approvals in respect of certain expense items, as a prerequisite for recognition of such items in their financial statements.

Over the years, the application of Rule 4 had created difficulties for companies seeking to recognize expenses incurred with respect to legally binding contracts and commercial transactions simply because the contracts were not registered with relevant regulatory bodies.

The revocation of Rule 4 implies that companies would now be able to recognize/accrue for expenses relating to valid contractual/legal transactions even where such contracts are not registered with relevant statutory or regulatory body.

The revocation further indicates FRCN’s willingness to align its rules and practices with the Conceptual Framework for Financial Reporting issued by the International Accounting Standard Board (IASB) which hitherto provides for accrual of expenses on financial transactions once the recognition criteria is met, even in the absence of an approval or registration with the relevant statutory or regulatory body.

While the revocation of the rule is a welcome development, companies and taxpayers also need to evaluate the tax deductibility of payments made in relation to such unregistered transactions.

Tax authorities often require such regulatory approvals as a basis for treating such transactions as tax deductible.

Thus, taxpayers may still encounter difficulties with the relevant tax authority in claiming tax deductions on certain types of payments.

It is, therefore, important that taxpayers seek professional guidance when carrying out similar transactions to ascertain their legal rights and obligations and to avoid unforeseen liabilities.