There is no debate that developing accurate accruals is a key tenet of an effective period-end closing process. However, this is one aspect of the close that has become quite unwieldy at a significant number of companies and, in some cases, has taken on a life of its own. Whether related to accrual thresholds that are too low or policies that are either inconsistent or unenforced, unnecessary accruals can be a costly exercise and a waste of valuable resources.
Recently, a Peeriosity PeercastTM featured a $50+ Billion technology company with over 100,000 employees that shared how they have been able to make the accrual process more streamlined and efficient, and provided some insights and lessons learned that can be helpful to other companies in improving this important aspect of their Record-to-Report operation. With major manufacturing operations spread across the globe, this company faces a daunting challenge in ensuring that the accrual process allows the company to properly report its earnings, without becoming a major burden to support the effort.
One effective tactic utilized by the feature company to ensure the efficiency and standardization of the accrual process is the use of a global process owner. While there is a global process owner for the entire Record-to-Report process area, this company also utilizes secondary process owners for core processes, such as accruals, within a functional area. This design allows for the primary process owner to be at a high enough level in the organization to be able to exercise the necessary influence to get things done, while also providing for focused leadership at a more granular process level.
The feature company then shared some of the specific tactics they use to ensure the accrual process is used effectively and according to company policy. One approach they take is called the “Show Me Tests” where a group of Shared Services employees travel to the different service centers across the globe twice a year and perform reasonableness testing of specific accounts, as well as a review of standards with personnel.
Another tactic used in conjunction with the implementation of a global standardized policy for accruals is a formal process to carefully track and follow up on process deviations. Specific analysts are responsible for closely monitoring the accruals that are posted and tracking in detail policy exceptions. This helps to determine the root cause for this type of policy exception and allows the issue to be resolved in a timely manner so that it does not occur again.
A variety of additional tactics were shared by the feature company during the Peercast, including several in the areas of process improvement and training. Finally, they shared details around a corporate-wide entry that is booked at the end of the quarter to capture liabilities below their materiality threshold. The practice to recognize this liability is referred to as the Blanket Accrual Process.
In conjunction with the PeercastTM were two iPollingTM questions. The first addressed how spending is accrued for at the end of the accounting period. Looking at the results, having the financial system create the accrual based upon each individual purchase order and/or invoice was the most prevalent method, with 25% of the companies doing so. This was followed closely by having accrual preparers work directly with the business units to determine the amounts to be accrued (21%). In addition, 13% of the companies create an accrual outside the financial system using each individual purchase order and/or invoice, while another 13% do the same, along with adding a materiality threshold.
The second polling question then looked at how liabilities that fall below the materiality threshold are handled as it relates to the accrual. For 53% of the responding companies, there is no accrual at all for expenses that fall into that category; while 18% are using a blanket accrual similar to that used by the feature company to ensure the impact of those expenses is accounted for properly.
Some of the comments from Peeriosity members related to the poll include the following:
Manufacturing Member: Invoices on hand that are not entered into the system are accrued by each SSC. The accrual for goods & services received, but not yet invoiced, where there is no GR transaction entered in the system is prepared working with the businesses.
Energy & Utilities Member: We have multiple aspects to our approach, including an SAP automated AP accrual for vendor invoices coded, but pending approval. Additionally, we have a general ledger manual accrual that is a sizable generic accrual based on refined estimates. We also, at local level, have manual AP accruals based on goods/services received, but not yet invoiced (based on PO) and based on vendor invoices in hand that have not been submitted for posting via the AP system. We do have a business practice governance document that sets a materiality threshold, but for all intent and purposes, the threshold is generally ignored and manual accruals are made for amounts at all levels.
Manufacturing Member: Our systems perform automatic accruals based on items received at the end of the period. Manual entries are performed for any items outside of the system process.
Healthcare, Pharmaceuticals, Biotech Member: PO-related invoices are accrued through the financial system, regardless of materiality. Non-PO invoices are accrued manually above materiality thresholds based on automated reports that provide historical data.
Manufacturing Member: Our system automatically accrues when a goods receipt is recorded against a purchase order. For items not supported by a P.O., we work with the businesses to identify necessary accruals. In those cases we do apply a minimum threshold.
Non-Profit Member: We accrue everything that has been entered into our Accounts Payable system. In addition, we manually accrue invoices over $10K paid after year-end that were not previously entered in AP before YE.
Non-Profit Member: The majority of expense accruals are generated by our systems at the end of the month. However, more detailed reviews are conducted on a quarterly basis that may result in additional accruals. There is no threshold on the system generated accruals, but manual accruals are looked at from a materiality standpoint before booking.
Consumer Products & Services Member: We have two main accrual processes; one is automatic within the system and the other in manual. We use a minimum threshold for the manual accruals.
Consumer Products & Services Member: We have a combination of processes. Where there is a Purchase Order in place, if the requisitioner notes that they have received the goods/services, but no invoice has been booked at period end, the system automatically books an accrual. If there is no PO, then each business unit has an approval process to go through to set up an appropriate accrual. For these ‘manual’ accruals, we set a threshold and do not book any accrual for items below the threshold.
Manufacturing Member: Our financial system generates accruals for PO purchases. For non-PO purchases, an off-line accrual process is used at calendar quarters.
How effective is your company’s accrual process? Are there further improvements to this critical process that can be put into place with a reasonable amount of time and effort?
Who are your peers and how are you collaborating with them?
“PeercastsTM” are private, professionally facilitated webcasts that feature leading member company experiences on specific topics as a catalyst for broader discussion. Access is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from attending or accessing discussion content. Members can see who is registered to attend in advance, with discussion recordings, supporting polls, and presentation materials online and available whenever convenient for the member. Using Peeriosity’s integrated email system, Peer MailTM, attendees can easily communicate at any time with other attending peers by selecting them from the list of registered attendees.
“iPollingTM” 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 MailTM, members can easily communicate at any time with others who participated in iPolling.
Peeriosity members are invited to log into www.peeriosity.com to join the discussion and connect with Peers. Membership is for practitioners only, with no consultants or vendors permitted. To learn more about Peeriosity, click here.