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Considerations for developing a Chart of Accounts.
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1
Chart of Accounts Considerations
Discussion Document
2
Issues Facing Companies
Why Focus on the COA?
Impact of Future Reporting Requirements
What is the Chart of Accounts
Finance Reporting Vision
COA Myths vs. Realities
Reasons for Undertaking a COA Project
Contents
Issues Facing Companies
Multiple, disparate systems and limited system interfaces
Numerous general ledgers and chart of accounts
Large number of intercompany accounts
Large number of legal entities
Manual workarounds
Differences in management, performance, and legal entity reporting
Re-keying data between systems
Calculating allocations (i.e., corporate charges, facilities, IT, legal)
Poor data integrity
Lack of written policies, procedures, and work instructions
Lack of organizational accountability
Gaps in skill sets and functional expertise
Complexity of the business
Dependencies outside of the finance organization
These issues are primarily
process-related and are
often caused by a lack of a
common chart of accounts
and reference structure.
Why Focus on Chart of Accounts?
With added emphasis on reporting efficiencies and reporting requirements, integration and consolidation many companies are discovering that their chart of accounts are either broken or in need of modification.
Companies, regardless of size, recognize problems in data collection and reporting and the current impacts on the close, consolidation and reporting processes.
The Chart of Accounts is broken
The Chart of Accounts is obsolete
Too many Charts of Accounts
The Chart of Accounts is unmanageable
Chart of Accounts is inadequate
Disparate reporting systems requiring human intervention/mapping
Existing Chart of Accounts do not capture reporting requirements
Future requirements not taken into consideration (IFRS, Growth)
Impact of Future Reporting Requirements
Revenue recognition
Research & development costs
Acquisitions
Impairment tests
Inventories
Restructuring
Fixed Assets
Provisions
Income taxes
Employee benefits
Financial instruments
Consolidation
Magnitude of effort: ‘more than just an accounting exercise’
New controls and policies to support judgments
Costs associated with enterprise-wide conversion, including
audit effort and other external adviser costs
Upgrade and adapt systems across entire enterprise
Stakeholder expectations, including budget/planning and
investor relations
Audit effort related to first-time adoption
The impact of IFRS, even if not adopted, will be added emphasis on reporting. As the
public and other relationships adjust to the reporting, companies will need to address their
capabilities.
What is a Chart of Accounts?
A listing of typical account names, descriptions and classifications that are used for
recording accounting transactions.
1000 Assets
2000 Liabilities
3000 Equity
4000 Revenue
5000
6000
7000
8000
9000 Miscellaneous
Expenses
Other Income &
Expense
There are many variations on the numbering
convention, but generally these range of numbers are
utilized and follow a financial statement presentation.
• There can be significant variations for
international companies
• Certain industries have unique requirements
to capture specific information to facilitate
regulatory reporting
In the General Ledger most accounts can be configured in a major and minor account
format
What is a Chart of Accounts?,- cont.
1 0 0 - 0 4 0 7
Major Account Minor Account
Expense Account Related to a specific expense
So if the 7040 account was a travel account, the 001 suffix
might represent a specific type of travel the client tracks
This account configuration will exist in the General Ledger, but to be meaningful, the
source of the transaction must be coded correctly.
The MORE COMPLEX the account structure, the greater
risk of DATA INTEGRITY issues.
COA is a key element of the consolidation process
In this example, it is
necessary to have a
COA that can
summarize the G/L
accounts into a Corp.
COA that facilitates
Management, Statutory
and Regulatory
reporting
G/L accounts are mapped to Consolidation accounts
What is the Chart of Accounts? – cont.
Detailed Account –
Major and Minor combinations
Summary
Account
Finance Reporting Vision
A cohesive COA structure that provides for efficient consolidated financial reporting and
enables business unit management reporting and analysis.
Financial
Statement
Integrity
Predictable, Explainable
Financial Results
Organizational Accountability
Skilled Workforce
Seamless Work Flow
Financial Fundamentals (Standard Chart of Accounts, Integrated G/L, Subsystems, Sub-ledgers, Data definitions, Procedures)
Certification
Single Version of the Truth
Reporting Transparency
Process Redesign
Training & Tools
Core Financial
Transaction
The COA is
the “Foundation”
for efficient
Reporting and
analysis.
Standard Common Chart of Accounts – at some level
COA Myths v. Realities
COA Myth COA Reality
A COA is set of 5 or 6-digit
account numbers to which
transactions are coded.
A COA is part of an overall reference structure (code
block) that can include 20 or more fields to which
transactions are coded.
Migrating to one COA will solve
all COA-related issues
Without proper integration, migrating multiple business
units to one COA can have negative results. E.g. A unit
that uses 100 accounts could gain access to 4,000.
There is an ideal number of
accounts for all companies.
At the G/L level posting account, this is a Business Unit
or Operation Unit decision. However, at a consolidated
level there should be hundreds of accounts, not
thousands
COA changes entail only
changes to the general ledger.
When modifying a COA, upstream and downstream
systems must be considered. (Upstream: sub-ledgers,
off-system GL’s, etc.) (Downstream: consolidation tools,
data warehouses, other query tools, etc.) COA projects
have a significant change management component and
require communication, testing and training.
11
Data Request Forms Facilitates
Improvements to
Close and
Reporting Process
Allows for
Improved
Analysis Other
Allows for
Enhanced
Controls
Benefits
• Information is compiled
from GL rather than
manually -allows process to
be re-designed
• Statement of cash flows can
be automated
• Fewer accounts to reconcile
Benefits
• Simpler structure decreases
risk of errors by
accountants
• Fewer accounts to maintain
and reconcile
• Manual data gathering tools
can be eliminated
Benefits
• Consistency in account
usage
• COA at right level of
granularity
• Meaningful account
groupings
Benefits
• Facilitates aggregation of
tax information (e.g. M&E
and other Schedule M
information)
•Allows for aggregation of
other “one-off” reporting
requirements (e.g. census,
D&B, etc.)
Reasons for Undertaking a COA Project
Benefits can only be realized if processes are re-designed to take advantage of
enhancements.
Contact Information
Kevin J. Duffy
www.linkedin.com/duffyri