A world-class close is performed efficiently and effectively, in a few days or in some cases a few hours, with as few people as possible, using as little technology and time as possible, and with minimal use of manual or miscellaneous journal entries. After the books are closed for the reporting period (day, week, month, quarter, or year), within a few short hours final reports can be generated, the numbers are accurate, auditors check controls, and everyone goes on to focus on making money or reducing costs in the next reporting period – not on compiling and disseminating reports.

A world-class close can only happen when it is a priority for C-level management. But as a corporate strategic initiative, a world-class close can also be an indicator of a world-class organization with the following characteristics:

• Management and employees are all held accountable for the business.
• Performance metrics are aligned throughout the organization.
• Continuous Improvement programs are well established.
• IT systems are highly integrated.
• The organization is nimble and can easily respond to changes in the business environment.
• The organization is committed to training and cross-training employees.
• The organization values innovation.

In an organization with a world-class close, accounting and finance teams recently described their processes and day-to-day responsibilities. Common characteristics include:

• Enter data only once at the source.
• Automate the reconciliation process.
• Control tightly any manual or miscellaneous journal entries.
• Continuously review the period-end close process and recommend improvements.
• Hold yourself accountable for the period-end schedule and process.
• Time system run-times to the hour and minute.
• Track and hold yourself accountable for any booking errors.
• Centralize the period-end process for IT, finance, and accounting teams.
• Be accountable for compliance to the period-end process.
• Move to a single, global chart of accounts if you are not already there.
• Ensure that anyone who is held accountable for their departmental budget, both revenue and cost centers, understands the close process and receives or can access updated reports whenever needed. Variances will be easy to spot and to respond to.
• Make it easy for internal and external auditors to monitor controls over financial reporting by automating virtually every step.

A world-class close can have different characteristics in different organizations depending on numerous factors. For example, one organization may perform a full close each quarter without performing a monthly consolidation. In Month One, a local close provides reporting on the operating income detail. In Month Two, they would do a partial consolidation without, for example, eliminating profit in inventory. Another organization may perform a complete close quarterly at the corporate level but with sub-units still fully closing on a monthly level. Regardless, organizations should resolve any accounting issues before the closing so that the closing period does not turn into a decision-making period.

All contributing business units should also be tracked on the quality and the timeliness of their submission to the same set of metrics. For example, organizations should establish definitions for early, on-time, and late submissions (e.g. more than 4 hours before deadline, between 4 hours and deadline, and more than one minute late, respectively). The organization would then track the timeliness of the submission and publish a performance scorecard. Similarly, an organization would define thresholds for materiality. Anything above the threshold would be handled in the following reporting period to ensure that a timely report is released and the organization would focus on reducing, or eliminating, manual adjustments and corrections wherever and whenever possible. Using a single, global chart of accounts helps ensure accuracy not only in the reports, but also in the submissions with fewer variations – reducing the number of possible errors.

Focusing strategically on developing a world-class close process will bring the obvious benefit – less time spent generating reports and more time focusing on the business. The additional benefits for any organization can be substantial and provide a way to establish a culture based on quality and accountability, one hallmark of a world-class organization.

Nevertheless, outstanding issues that are not yet resolved – and may not be before the various deadlines – will affect filers, contributing to the chaos and confusion of any significant transition in reporting requirements. For example, IFRS does not yet have standards for the treatment of insurance contracts, recapitalization transactions, extractive activities, some common control transactions, reorganizations, and other similar transactions. Also, IFRS permits various accounting practices based on local standards, something the SEC seeks to eliminate. But even today U.S. GAAP also does not have a single standard for property, plant, and equipment or even revenue recognition.

In addition there are known differences between U.S. GAAP and IFRS. For example, IFRS does not permit accounting for inventory on a LIFO basis and instead requires FIFO which could impact taxable income based on differences in inventory valuation using the two methods.

Complications would also impact companies that invest in entities that don’t report using IFRS or private companies planning an IPO that need to switch to IFRS from a different standard. And companies that do not operate globally will be challenged to adopt IFRS both for financial reporting and auditing, e.g. reporting on the effectiveness of internal controls over financial reporting (SOX Section 404).

The SEC has asked for comments to help it assess two alternative reconciliation proposals, neither of which has yet been selected. The first proposal would require a one-time reconciliation from U.S. GAAP to IFRS1, whereas reconciliation in the second proposal would cover a three-year period. If option 2 is approved, large accelerated filers would need to reconcile 2012 – 2014, accelerated filers would reconcile 2013 – 2015, and non-accelerated filers would reconcile 2014 – 2016. In effect the companies would need to issue two sets of reports in each of the three years, one set following U.S. GAAP rules the other set using IFRS standards. Of course, some large global companies may already have to report using both.

Depending on company size and the number of times reconciliation disclosure is required, the SEC estimates modest costs for the IFRS roll-out, anywhere from 0.125% to 0.13% of revenue, a number that is expected to drop over time. However, if the SEC’s SOX compliance estimates are used as a predictor, then their cost estimates for adopting IFRS are much too low.

Although the SEC decision is not expected until 2011, the time to prepare for what appears to be an inevitable future is now. The difficulty and complexity in IFRS reporting will only be exacerbated for organizations that frequently acquire other companies, frequently reorganize, or have different charts of accounts (COAs) for various business entities. It stands to reason that compiling period-end reports for them is already difficult and will only be more so as U.S. GAAP rules morph into IFRS standards.

At the very least, organizations should move toward adopting a single COA for all business entities. At a minimum this will mean that all of the convoluted mapping during period-end consolidation will be minimized, if not completely eliminated, along with the myriad spreadsheets consumed in the effort. IFRS compounds the issue for U.S. filers accustomed to following rules by establishing standards and not publishing a recommended COA. The sky is the limit, or so it seems. But adopting a COA that can accommodate various lines of business in different countries and industries is not an insurmountable task if best practices are followed. The question then becomes, what are those best practices?

In If IFRS…Then, Part 2 we share best practices in COA design.

eprentise can help you get to a single global COA with FlexField software. Please see the following articles that will assist you in designing a new chart of accounts that complies with best practices and align your chart of accounts with your business:

• Putting Numbers In Boxes – Part I
• Putting Numbers in Boxes – Spring Cleaning for Charts of Accounts II
• R12 Financials Overview
• The CHANGE – TEST – UPGRADE Advantage
• Into the Future (And Back Again)
• Out of Range: Using Logical Ranges
• Flexfield Differences Between Releases 11i and 12

1. Build Flexibility into the Structure

The trick in designing a new COA or changing an existing COA is to always keep in mind that the future will bring change. Whatever structure you design will also need flexibility. This may sound like an impossible goal but is easily achieved by putting values for each segment into ranges that are large enough to accommodate significant growth or change in the future. For example, in Out of Range: Using Logical Ranges, my colleague Helene Abrams describes how a project segment set up in an accounting flexfield with the values 55000 – 55999 might represent a specific type of project. There is room in this structure for at least 999 different projects of that same type, and you can tell just by looking at the number what type of project it is. If the range were 550000 – 559999 there would be room for 9999 projects. If you know the trends in your business, you can define an appropriate number of characters for a segment and range. Don’t hesitate to broaden the range by increasing the number of characters in the segment. What may seem like a lot today, 999, might be wholly inadequate in a few years. Increasing segment values to accommodate growth lets you build flexibility into the COA structure, as long as you keep the total character count at or below 240.

2. Create a Hierarchy and Protect It

When designing the COA think in terms of an outline, hierarchy, or parent/child relationships. Group product lines into categories, and then define the ranges for the categories. This will help you determine where you will need to allocate more characters and where you can have fewer characters. Usually children in the family tree will be more granular and will therefore require more values, but not always. By sketching the COA family tree you will see where you need to build in room for expansion.

Once the COA tree structure is designed and implemented, stick to it. Resist the temptation to share account values with different account types because it’s “easier” to do it that way in the moment. Establish procedures, protocols, and definitions for values and types and make sure that everyone involved understands how to use them and what they mean.

3. Address Politics from the Start

By having a cross-functional team work on the COA design, global buy-in will be all but assured. However, don’t let one group dominate the decision-making process, e.g. finance ends up with 200 characters leaving only 38 for everyone else.

Designing a logical and flexible COA for Oracle E-Business Suite can start with a simple table, created in Excel, like the one below. The detail for each major category such as Company, Location, Department, Account, and Product Family for which data exists is expanded in another tab.

The spreadsheet for the Account type will include fields for the following additional information, for example:

• Range – the range of numbers in which the item falls
• Segment value – the actual number assigned to the item
• Item name or description
• The account type – Revenue, Expense, Asset, Liability, or Owner’s Equity
• If applicable, the old account number or segment value
• The parent account or rollup value
• Whether or not there are any cross validation rules with the Account Value and the Company, Location, Department, or Product Family values

4. Use Numbers Only Randomly

Avoid using intelligent numbers in any scheme you design. For products, where intelligent numbers can help to identify a particular product family or subgroup to a customer, devise a scheme where you have both non-intelligent and intelligent numbers for a particular product. The non-intelligent numbers will be used for internal and financial reports but the intelligent numbers can be used in a customer-facing environment. Also, wherever possible, avoid using alpha characters, except potentially in parent values, because these will create problems in sequencing and sorting data in reports, assigning codes, using ranges, and when creating validation and/or security rules. If you do use letters, use only capital letters for consistency and to facilitate any queries you may need to run.

5. Keep One Type of Data in One Segment

Each segment should have one – and only one – type of data in it. For example, there shouldn’t be a Department segment value such as “HR – Sacramento, CA” if there is also a Location segment in the chart. The location data, Sacramento CA, should be kept only in the Location segment, and not also in the Department segment. It is more difficult to write a rule for a segment that includes multiple types of information, and keeping the data in only its relevant segment helps reduce redundancy.

R12 Features Applicable to the IFRS Transition
Secondary ledgers and Subledger Accounting are welcome additions in R12. Sets of Books in 11i are Ledgers in R12, and Ledgers and Ledger Sets bring along with them a new and different method of performing accounting in EBS. From a single transaction ledger where a transaction is entered only one time, R12 uses accounting rules to populate other related subledgers. In this new light, a company that currently reports according to US GAAP standards is able to set up a secondary ledger specific to IFRS standards. Once the business understands how the current GAAP transactions should be mapped in order to comply with IFRS and is able to implement the mapping in the form of R12 accounting rules, EBS will take care of translating the transactions to the IFRS subledger, and IFRS compliance becomes transparent to the users. Users may continue to enter transactions in the way with which they are familiar: according to US GAAP standards. With each new transaction that is entered, R12’s accounting rules will populate the IFRS secondary ledger with the corresponding IFRS transactions. Of note here is that this can and should be accomplished with a single Chart of Accounts, provided that the Chart is designed with respect to both US GAAP and IFRS reporting standards. If a business takes the time to redesign its Chart of Accounts to accommodate both standards as well as the five guidelines listed above in the article, it will find itself in an excellent position to transition to IFRS in a seamless manner.

Conclusion
Designing a flexible COA that will work as well today as it will in the future when business takes unexpected turns takes a little forethought and sometimes some experience. A well-designed COA along with the new features in R12 make it easy to comply with IFRS standards and to reconcile with the current GAAP standards. A well designed COA should do its job for years to come while ensuring that management has timely access to reports and finance teams can quickly and easily consolidate period-end reports. When COAs are different, the best medicine is a consolidation into a global COA and redesign rather than another work around or spreadsheet.

But our collective memories are relatively short. Already new mortgage-backed securities are being sold, this time on the backs of first-time home-buyers even as Dubai World sends jitters through the financial community. Are we able to recognize the weak signals that will eventually turn into tsunamis, but well in advance, so that we have time to react? Or are we still relying on the tried and true lagging indicators, quarterly sales reports and performance reviews?

And even if we recognize the signals and know what we need to do in order to stay competitive, will we be able to adapt quickly and then sustain the ability to respond for the next time when conditions change yet again?

Dealing with Change – Teaching an Old Dog New Tricks

Gartner maintains that companies need to be proactive in reacting to changes and recognizing the early indicators and patterns that can provide visibility into potential future opportunities and threats. These early-warning predictive patterns are increasingly coming from outside the enterprise, driven by an interconnected society and changes that are outside the control of an enterprise. As the investors in Dubai World seek funding, US corporate executives worry about the impact on their already fragile economic recoveries and how deliveries passing through the busy United Arab Emirates ports will affect their just-in-time supply chain. Earlier Sense and Respond systems and Business Intelligence systems did not focus on the transactional data in ERP systems that might reveal indicative patterns of future changes and help executives make fact-based decisions. Further, Yvonne Genovese, Gartner VP and Distinguished Analyst, identifies several factors that inhibit the ability to predict and adapt to change in ERP systems. Genovese maintains that, even when exceptions are recognized in an enterprise, there is “siloed visibility” meaning that the exceptions are not shared across different organizations. Additionally, the lack of transparency and the presence of conflicting data often result in conflicting patterns, and finally, ERP systems by their very nature are not flexible enough for decision makers to change the business processes in order to react to and change the pattern quickly (and not a 3-year reimplementation process).

Gartner identifies three component parts of Pattern Based Strategy: Seeking, Modeling, and Adapting. Read more…

As time passes, documenting the period-end process becomes more complex, and maintaining the process documents takes more and more time. But the collective memory of the finance team hasn’t forgotten what it was like to get through that first ERP implementation project – not to mention its enormous expense – and any hopes of improving the situation are abandoned as soon as someone says, “What about the ROI?”

Finance teams would have a better chance of responding to the ROI question if they banded together with their colleagues in purchasing, HR, product management, manufacturing, sales, marketing, and IT as they struggle with the same legacy ERP systems. Ask around and you’ll find that all of them have created their own sets of creative workarounds just to get through another day.

It’s happening everywhere…. Read more…