The accrual process can be quite simple if a Purchase Order is used and a receipt is entered since the receipt will likely generate an accrual automatically.  However, if items are purchased that are not received, or purchased without a PO, everything gets a little more complicated. 

In a Shared Services environment, providing flexibility for business units to independently make accrual bookings does place the decision in closer proximity to where items may have been received or where services were performed.   After all, it may be difficult for a service center located in a different time zone to ascertain whether or not the grass was mowed at another company location.   The big question is whether or not proximity is a compelling enough reason to keep the accrual decision local.

One major challenge with local accruals is administering appropriate materiality thresholds and standard processes across multiple business units without yielding to the temptation to over-analyze the need to make an accrual in the first place.  One common example is the flurry of accrual entries that are made to satisfy the typical operation manager’s interest in fine-tuning their monthly budget vs. actual reports. 

Using iPolling¹, a Peeriosity member in the General Accounting research area asked the following questions:

1. Does your company allow business units to enter accruals?

2.  Does your company use software (outside standard financial system functionality) to automate the accrual process?   

For 57% of the companies, the General Accounting staff in Shared Services performs the accruals. Another 40% of the companies take the opposite approach by allowing local business units to create accruals with no additional approval required prior to posting to the general ledger.

Regarding the use of special software that has functionality that is incremental to the standard financial system, 62% have not evaluated this option.  An additional 32% utilize specialized software with the 80% of those companies developing a custom solution internally.

Comments from iPolling^TM participants provide additional insight:

·         Business units enter their own accruals within specified dollar limits.  Accruals over $500k need Controller approval, and over $1M needs CFO approval. This is at a divisional level.

·         We currently allow business units/locations to enter their own accruals, as well as certain inventory-related JEs, directly into the financial system. However, we are in the process of transitioning the posting of these entries from the business units to General Accounting so that General Accounting has the opportunity to review and approve the JEs prior to posting to the general ledger as required by company policy. In those ERP systems that have the capability to park JEs, we will rely on the parking functionality due to the volume of entries. For those systems that do not have parking functionality, we will require the business units to submit the JEs to General Accounting for processing.

·         We have an internally automated accrual tool; many requests meet pre-set criteria and require no further review, but some do require further review by G/L before final posting.

·         Regarding software, where units use the Ariba purchasing system, we use that to generate an accrual to be posted to SAP. Otherwise SAP POs generate an accrual proposal. Judgmental accruals are submitted by units to General Accounting in our SSCs.

·         Posting is centralized at Corporate Accounting based on information provided by outsourced Shared Services.

·         We have both a business and SSC accrual process. The SSC accrual is mainly about Accounts Payable and employee expenses, with business units performing department accruals. The SSC accrual needs the General Accounting team’s review and the business accrual is posted directly.

·         Currently created and posted by other areas of Finance, although this is not necessarily the intention going forward.

·         Our staff accountants review the business unit financials and make accruals on their behalf. The individual business unit does not make these decisions.

·         In our Global Financial Shared Services organization, we provide a “full-service package” for the Business Units. This means the Shared Service Center receives the details for posting the accruals into the ledger and makes the entry.

From an accounting standpoint, accruals are performed to comply with the principle of matching expenses with the period in which they occur.  From a practical perspective, for small dollar purchases what isn’t accrued in the current month is likely to be pretty close in total dollar value to what wasn’t accrued last month, yielding a net impact to the P&L on a month-to-month basis that is immaterial.   Without defined processes for how accruals are determined, the result can be many hours of analysis with a large volume of accrual transactions generated. This can result in little or no impact on the quality of financial statements or the quality of management reports used to run the business. 

For many companies, centralizing the accrual process within the General Accounting department of Shared Services has been determined to be an effective way to streamline the accrual process and ensure consistency.   However, as detailed above, a large number of companies continue to take the opposite approach and permit business units to create accruals independently.

How is the accrual process managed at your company? 

Who are your peers and how are you collaborating with them?

¹ “iPolling” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content. Members have full visibility to all respondents and their comments. Using Peeriosity’s integrated email system, Peer Mail^TM, members can easily communicate at any time with others who participated in the iPoll.