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Chart of Accounts Considerations

Discussion Document

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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The Chart of Accounts is obsolete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.

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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

duffyri@yahoo.com

www.linkedin.com/duffyri