Case Analysis - Group Accounts
Diversity of Data Source Formats
Finance operators within corporations face many challenges associated with the consolidation of a large number of financial reports and as a result request regional finance offices to submit their financial reports in a pre-defined standard format. These formats are often different from those used locally and hence work has to be done to produce the new formats thus reducing staff productivity.
Users want to simplify data collection and formatting time in the production of these documents both at the office producing the report and those that are doing the consolidation.
FlexCalc has been designed to recognise the different data sources despite the fact that it contains different presentational formats and formatting features.
Finance headquarters and regional finance offices can use the same set of financial reports for daily operations and decision making so that the quality of information and efficiency of the group consolidation process is enhanced simultaneously thus improving productivity.
Using processing rules to process data also minimizes the need for manual intervention and as a result the quality and internal control over the preparation of these financial reports are improved substantially.
Professional accountants can leverage their core competency to focus on value added activities thus improving overall productivity and continued enhancement to their financial operations.
Differing Financial Year End Dates
When preparing consolidated financial statements all subsidiaries and associates of a group company shall prepare their financial statements with the same financial year end date. As a result some of those companies may have to undertake additional work when their financial year end dates differ from the parent company.
Transformation of financial statements with different financial year end dates is a laborious and tedious task and one expects that the work can be performed by the system automatically.
FlexCalc has a built-in mechanism offering specific data transformational services to consolidate any financial statements that have a different financial year end date.
The system can offer responsive support for decision making as the preparation of consolidated financial statements is no longer delayed by the effect of different financial year end dates.
Recognition of Chinese Characters within a Data Source
Financial Statements may not contain an account code and therefore recognition of account names becomes critical to get the relevant financial information inside of your financial statements. The preparation of two sets of financial statements in differing languages is a costly exercise which also affects the timeliness of financial information.
It is expected that modern accounting software can handle multiple languages and that the system is able to recognize and validate financial statements in different kinds of languages.
FlexCalc provides comprehensive mapping functions, allows for the configuration of multiple language mapping tables for each ledger. This allows users to upload their financial statements prepared in Chinese Language directly as the system has a built-in lookup process to automate the recognition and transformation of different languages. So consolidated financial statements can be processed and generated automatically.
Productivity of finance offices at a regional level as well as at headquarters are greatly improved as users are not required to prepare two independent sets of financial statements in different languages manually.
Time Pressure to Maintain Multiple Scenarios of Group Consolidation
Time is of the essence and a listed group has to prepare its consolidated financial statements with multiple scenarios with the two main classes of scenario being as follows:
► Statutory consolidation
► Management consolidation
To comply with the requirements of statutory consolidation the following reasons will trigger the need for different multiple scenarios of the financial consolidation:
► To comply with regulatory requirements for different regulatory bodies
► To comply with accounting policies of its immediate holding companies and ultimate companies
► To comply with the management requirements for preparation of consolidated financial statements having different scenarios of business planning
To satisfy the management requirements of consolidation the following reasons will trigger the need of multiple scenarios for financial consolidation:
► To prepare different types of consolidated financial statements (i.e. Budget, forecast, preliminary, flash and actual etc.)
► To prepare consolidated financial statements with different currencies, entity combinations and recognition assumptions
It is highly expected that the new system can manage the generation of multiple scenarios effectively and with a high degree of automation.
FlexCalc is supported by 1) calculation rules specification, 2) the scenario group and the scenario group adjustment and these items are all important functions available during the configuration process. In addition, the implementation of these scenarios allows users to select the following options:
► Output to multiple adjustment ledgers
► Output to multiple ledger sets
► Output to multiple scenarios inside a ledger
The work of professional accountants can be improved fundamentally as they can support management for differing scenarios and most importantly reduces the lead time of preparation and the quality of the consolidated financial statements.
IFRS 8: Operating Segments
Using a “managed approach” to identify, measure and disclose the financial performance of a company or a group of companies is a distinctive feature of this accounting standard compared with other accounting standards. The requirements are not only limited to dealing with a single company or a group of companies as a whole, but also includes the disclosure of financial performance for some of the material operating segments.
Key implementation issues are that the standard requires disclosure of financial performance for some of the material operating segments and these are reviewed by internal management and often involve a crossover between financial accounting and management accounting. More sophisticated internal control procedures over the preparation of financial statements is required and as a result control procedures and control environments are aligned with financial accounting for the purpose to comply with IFRS 8.
Ease of integration of accounting systems and operational processes between financial accounting and management accounting is vital to ensure that management is using correct information and is in full compliance with the standard.
Strong integration with Microsoft Excel enables FlexCalc to provide an integrated solution for the preparation of financial statements for both internal management plus stakeholders and financial accounting and management accounting tasks are executed using controlled procedures environment.
Long term costs and risks associated with the Shareholder value can be increased gradually as results of increased quality and timeliness of financial information percolate through the organization.
Operational Challenges with Foreign Currency Translation
This is to analyze the operational issues associated with the implementation of the current rate method. In general, there are two main classes of exchange rate used in the conversion of financial statements which are denominated in foreign currencies which are:
► Historical rate – exchange rate prevailing at the date of transaction
► Current rate – closing rates that are applied to all transactions
Most items appearing in financial statements are translated at current rate except for share capital, share premium, and retained earnings.
Since there may be a large number of transactions it may not be practical to translate these items at the actual prevailing exchange rate at the date of the transaction during the consolidation process and therefore typical methods of approximation are used:
► Simple average rate measured on daily basis
► Simple average rate measured on monthly basis
► Weight average rate measured on monthly basis
The methods of approximation adopted above will therefore result in different amounts of exchange reserve so there are two routes for the completion of the translation for share capital, share premium and retained earnings accounts and these are:
► Translate at the current rate initially, and preparation of adjustment vouchers for the calculation of exchange differences between current rate and historical for each class of asset and liability.
► Translate at historical rate and calculation of net effect on exchange reserve directly.
Although the end results of consolidated financial statements are identical for each of the above routes only the first route can generate the breakdown of individual voucher adjustments to explain the exchange reserve movement of the components.
Most customers will not accept changes in accounting policies as result of the implementation of a new accounting system and there is no way to generate the same results for the financial statements when the new system does not allow them to apply the prevailing accounting policies.
FlexCalc offers implementation options to fit a particular situation. In addition, the system allows users to define their method of approximation for the historical rate and for the different routes of translation for each of share capital, share premium, and retained earnings accounts.
Consistency of accounting policies can be maintained upon implementation of the new system so implementation costs and uncertainty can be reduced effectively.
Collection and Confirmation of End User Requirements
Knowing how to approach this complex area by leveraging your existing systems could lead to significant compliance issues if existing controls and processes are not taken into account.
Customers are looking for an iterative approach for process customization and for a continuous iterative mechanism to speed up the putting in place of additional compliance reporting features.
FlexCalc can be implemented and managed using an iterative approach and can continually be fine- tuned to optimize processes.
Implementation costs can be dramatically reduced as the work focuses on the real requirements of an organization for each stage of iteration.
Differing Reporting Currencies within Overseas Companies
Financial reports come from your different entities in differing currencies and therefore a lot of exchange rate data and computational rules within the spreadsheets are common place when there is no standardized reporting currency. As a result control over the amendment of exchange rate data and its associated computational rules in respect of foreign currency translation becomes an operational problem especially when the number of consolidation reports increases over time.
Centralization of the storage and maintenance of exchange rate data and its associated computational rules in respect of foreign currency translation is essential to rectify the root problem caused by the duplication of data and its associated rules which are spread across a large number of spreadsheets.
FlexCalc stores exchange rate data and computation rules within its central data warehouse. Exchange rate data can be classified into five operational types namely opening rate, closing rate, average rate, historical rate and composite rate. Each exchange rate type can be configured to an individual account or class of account by an administrator. In addition, the processing rules are very comprehensive allowing for foreign currency translation to be according to end user requirements.
In addition the operations are user friendly throughout the consolidation process. The headquarters can use the well regarded Excel user interface to retrieve the required financial information directly on any individual company or on consolidated basis from FlexCalc and users are no longer required to insert a lot of exchange rate data and associated computational rules into spreadsheets.
Internal control over the management of exchange rate data and computation rules are improved significantly so that the management of headquarters can obtain high quality and timeliness of financial information to support their work in respect of performance management and decision making.
Operational Problems for the Implementation of Multiple Consolidation Methods
There are three main kinds of consolidation method namely full consolidation method, proportional consolidation method and equity method that a company may use. Each method has its own set of distinctive computational rules and extra work can arise when frequent changes of method are applied to a particular company within a group. Change of methods may be due to following reasons:
► Change in ownership and voting rights
► Change in interpretation and requirements of accounting standards
In accordance with the new accounting standard “IFRS 11 Joint Arrangements” that comes effective on 1st January 2013, the proportional consolidation method will be eliminated for jointly controlled entities but they will still have to include relevant information in the financial statements of its parent company. However, the method of computation can be more complicated than the proportional consolidation method as it is no longer restricted to a share of individual assets, liabilities, income and expenses based on an ownership percentage. In order to reflect the financial information in respect of joint operations, a more sophisticated account allocation method is applied to replace the use of the proportional consolidation method.
Reading accounting standards often provides limited guidance on how to implement the standard from an information system perspective. However, it does provide guidance on how to determine the selection and application of a specific accounting practice. Customers expect any new system to be adaptable to adapt to frequent changes in an accounting practice on a continuing basis without significant investment in the existing financial system.
The accounting practice of FlexCalc can be defined and configured dynamically by the combination and configuration of calculation rules, mapping tables, data filters and statistics. FlexCalc can support the full consolidation method, the proportional consolidation method and the equity method. In addition, FlexCalc can support frequent changes in the accounting practice for a group of companies.
Long term costs and risks associated with the implementation and continuity of a new accounting system can be reduced and controlled significantly as the system is able to adapt to changes in the accounting practice on a dynamic basis.
IFRS 11: Joint Arrangements
Proportional consolidation becomes history when IFRS 11 becomes effective in 2013. The accounting for joint venture or joint operations becomes more sophisticated as proportional consolidation will no longer be an acceptable accounting practice under IFRS 11. According to BC32 of IFRS 11, there are two key differences between recognizing assets relating to the activity of the joint operation compared with proportional consolidation.
These differences are:
► The IFRS requires an entity with an interest in a joint operation to recognize assets, liabilities, revenues and expenses according to the entity’s shares of the joint operation as determined and specified in the contractual arrangement, rather than basing calculations on the ownership interest that the entity has in that joint operation.
► The parties’ interests in a joint operation are recognized in their separate financial statements rather than in the consolidated financial statements despite relevant information being captured from the legal entity which is operating the joint operations.
Increase in complexity to deal with accounting for joint ventures is expected as proportional consolidation is no longer an acceptable accounting practice upon implementation of IFRS 11. There will be high demand for automation of accounting for joint ventures when the same group of joint ventures are classified as joint operations rather than joint ventures under the requirement of IFRS 11 so, both proportional consolidation and equity method will not allowed under this situation.
The strength of FlexCalcis not limited to group consolidation as defined by IFRS as FlexCalc has a built-in account allocation engine to deal with complex account allocations for joint operations. User can opt to create a separate ledger to collect and store all relevant allocated account balance for each joint operation or absorb the same set of data into the ledger of the holding company.
Benefits The incremental return on investment of FlexCalc is accelerated when the decision maker opts to maximise the usage of FlexCalc for different areas of computerization as the functionality of FlexCalc will help in the collection of all or sub sets of financial and non-financial information.
Differing Account and Analysis Code Setting
A group of companies may not implement a standard set of uniform accounts and codes for the following reasons:
► Different business segments operate autonomously from other companies within the same group.
► Companies are incorporated in a country where the account code is governed by law.
► A new company is added by acquisition.
► Information required at an individual company level maybe significantly different from information required at a consolidated level within a group.
Non standardization of account and other codes could have significant impact on the operations of the group consolidation function as extra work will be required for the transformation of diversity of financial information manually.
Users no longer want to be involved with the transformation of account and other code settings on a manual basis each month so that productivity can be increased.
FlexCalc is able to support different implementation options for Multinational Corporations to fit the particular situation as follows:
► Through uniform accounts and other code settings during implementation of a new accounting system at an individual company level or group level
FlexCalc is supported by a ledger system in which it is able to handle financial and management accounts of individual companies and it also supports the configuration of common account codes and other code settings which can be applied to the ledgers of each company or at the group level. In addition,
FlexCalc has built-in capability to deal with data migration.
► Through using an account mapping table for each company upon the implementation of the new group consolidation system at group level
FlexCalc has comprehensive mapping functions which allows users to manage the account code mapping table in a centralized mode or a decentralized mode.
Manual work in respect of account code transformation is eliminated effectively so that the lead time for preparation of consolidated financial statements can be shortened significantly.
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