Shipment Cutoff Best Practices (#201)

In this podcast episode, we discuss best practices for shipment cutoff, when the revenue associated with a shipment is to be recognized in one reporting period versus another period. Key points made are noted below.

Revenue Recognition Rules

Anything shipped by midnight on the last day of a reporting period is considered revenue for that reporting period. Anything shipped even a few seconds later becomes part of the revenue for the next reporting period. This is a major issue, if only because the auditors will check shipment cutoff at year-end as part of their year-end auditing procedures.

The real issue is that revenue could be recognized in the wrong period, which could trigger the reporting of profits that don’t actually exist in that period. Management might even encourage sloppy shipment cutoff practices, so that they can move revenue into different periods for their own purposes. For example, if management has promised investors or lenders that profits will be a certain amount, they can guarantee it just by keeping the books open, maybe for a couple of days after the actual end of the period. This is especially likely if the management team will earn a bonus if profits reach a certain number.

The Need to Systematize the Cutoff

A key best practice is to systematize the cutoff to the point where it’ll require some real effort for anyone to force a shipment into the wrong reporting period. For example, have the computer system print all shipping labels based on the system date. This means that someone would have to go into the computer system and manually alter the date in order to record a delivery in a different reporting period, which can be difficult. The shipments and their system assigned-dates then roll straight into the accounting system, where the software uses the assigned date to decide which period they fall into.

Prenumber Shipping Documents

Another possibility is to prenumber the shipping documents, so that any shipments made using a later document number are more likely to be associated with a later reporting period. This could involve running a report that notes the shipping document numbers for the last day of the reporting period. Any numbers that are too high are investigated.

Shipping Document Collection Procedure

Have a procedure where an accounting staff person is scheduled to pick up all shipping documents from the shipping department a few minutes after the end of shipment activities on the last day of the reporting period. Any shipping documents prepared after this pickup are assumed to be part of the following period’s shipments. This final batch of documents is then stored in a locked filing cabinet in the accounting offices until they can be processed the next business day.

Close the Books Quickly

Another approach is to close the books so fast that there’s almost no room for anyone to keep adding shipments to the preceding reporting period. For example, if it becomes standard practice to close the books and issue financial statements the next day, then there might only be a window of opportunity of a couple of hours for someone to keep recording shipments in the last reporting period.

Active Oversight of the Cutoff

A possibility that could create more conflict with management is active oversight of the cutoff. For example, have someone from the accounting department show up at the shipping dock and make note of the last shipment that went out the door as of the close of business on that day, and also make a copy of the shipping log. The actual revenues for the final day are then matched against the shipping log to see if any later deliveries were subsequently added to the period’s sales. A variation is to compare the pickup dates recorded by third-party shippers to the dates listed in the shipping log.

Active oversight is a solid internal auditing activity that should be used quite a bit. But, it can make sense to gain the support of the audit committee of the board of directors in advance. Otherwise, the examination might find an exception that was instigated by management to increase reported sales – and management will squash the findings. If the audit committee is already involved, it’s harder for management to interfere.

The Need for Backbone

The controller has to have a lot of backbone in enforcing a rigid cutoff. There can’t be any exceptions. If the controller ever allows employees to backdate deliveries, this opens the door for an ongoing stream of requests to keep doing it – and that weakens the ability of the controller to impose a strict cutoff.

Related Courses

Closing the Books

The Soft Close

The Year-end Close

The Revised Lower of Cost or Market Rule (#200)

In this podcast episode, we discuss the recent change to the lower of cost or market rule. Key points made are noted below.

The Original Lower of Cost or Market Rule

The original rule came from the Accounting Research Bulletins, so it’s quite old – from the 1950s. The original rule stated that you had to record inventory at the lower of its cost or its market value, so essentially it was a write-down rule – something that businesses usually did as part of their year-end close. This write-down could happen for a lot of reasons, such as a decline in market prices, or inventory damage or obsolescence.

The trouble with the original rule was that there were a couple of ways to come up the market value part of the comparison. It could be replacement cost, or net realizable value, or net realizable value minus a normal profit margin. This meant that you needed to create a detailed spreadsheet to figure out if there might be a write-off. And, since companies usually only did it once a year, there was a lot of wasted effort every year to figure out how the calculation worked again. In short, it wasn’t overly practical.

The Revised Lower of Cost or Market Rule

The new approach streamlines the calculation, but not if an organization uses the last in, first out method or the retail inventory method. Those people are still stuck with the old, complicated approach.

The new rule is that the lower of cost or market means the lower of cost or net realizable value. Net realizable value is the estimated selling price, minus any expected costs for completing the inventory, disposing of it, and transporting it.  There’s a certain amount of guessing and estimating to come up with net realizable value, but it can be done. And if market is lower than cost, then write off the difference.

From the perspective of a student, it makes the situation more difficult to comprehend, since you still have to learn about the more complex rules for the LIFO and retail costing methods. And if a company has subsidiaries where some use LIFO and some use FIFO, then different rules will apply to each one. Another point is that the results of companies will be slightly less comparable, depending on which lower of cost or market method they use.

The reason why they decided to use these differing approaches is that several companies using the LIFO and retail methods complained that converting to the new system would be excessively costly. So, because of these arguments, which strike me as being a one-time cost, we’re permanently stuck with a situation that’s even more complex than the old system, which was too complex to begin with.

Banning the Use of LIFO

A possible solution would be to ban the use of the LIFO method, since it’s already not allowed under international standards, and then force this new lower of cost or market approach onto anyone who’s using the retail method. And then we’d finally have a more streamlined system.

Related Courses

Accounting for Inventory

Inventory Management

The Year-End Book (#199)

In this podcast episode, we discuss the year-end book, which is a summary of the results of the fiscal year and supporting information. Key points made are noted below.

Contents of the Year-End Book

The year-end book includes the year-end financial statements and trial balance, which constitute the results of the year. The supporting information starts with the general ledger, and also includes the detail for the ending asset and liability balances. This means the accounts receivable aging, accounts payable aging, the ending inventory report, and the fixed asset register. All of these supporting documents should have totals that exactly match what’s in the general ledger.

The Year-End Book as Evidence

In short, the year-end book is evidence. For example, the company may receive a buyout offer, and the buyer wants to see the financial statements for the past couple of years, plus the information that supports the financials. If so, hand over the year-end book, and that may be pretty close to all they need. Or, the owners may want to take the company public, in which case the financials for the past couple of years will need to be audited. If so, the first thing the auditors will ask for is the year-end book, which will be the starting point for their audit.

Always print the book, since electronic files could be lost.

Book Preparation Issues

Do not prepare the book until the auditors have completed their year-end work, because they may have some adjusting entries to make, which have to be recorded as journal entries for that fiscal year. Which impacts the general ledger, and the trial balance, and the financial statements. So if you already printed out everything for the book, now you have to do it again. To get around this problem, put the year-end book at the very end of the schedule for the year-end closing process.

Ensure that what you’re including in the year-end book for the current year-end matches the information stored in the preceding year-end book. There might be an extra report or two in the older book that seemed like a good piece of record keeping to have – maybe a list of operating statistics. If so, be consistent and keep right on storing the same information. It might come in handy again.

Storage of the Year-End Book

Treat the year-end books like permanent documents. So, do not dump them into an archives box and send them to the warehouse. Instead, they go into a high-quality binder that’s well-labeled, and they’re stored in the safest place you have. And when you loan them out, keep track of who has them.

The Journal Entry Binder

If the auditors are reviewing the books for a prior year, you can expect them to ask about why certain journal entries were made – and you’ll have no idea, because the entry was made so long ago. To handle this situation, there should already be a journal entry binder, which is being updated with documentation for all of the journal entries as they’re made throughout the year. At the end of the year, wait for the auditor’s adjusting entries, add them to the journal entry binder and store this binder with the year-end book. By doing so, the auditors will have a lot of high-grade information that’s easily accessible in one place.

Otherwise, you end up in an odd situation where some of the reports don’t match what’s in the general ledger, or the financial statements, or the trial balance. And you won’t discover it until a year later, when the next audit starts, and the auditors can’t figure out why their beginning balances don’t match what’s in the year-end book.

Matching to Auditor Records

A good way to make sure that the year-end book matches the auditor’s records is to ask them. Just send over your trial balance – and ask them to compare it to what they have. If there’s a problem, then fix it right away, before too much time passes, and no one remembers what happened.

Parting Thoughts

In short, give the year-end book some respect. Assemble it carefully, as the absolute last year-end task, cross-check the information in it, and then store it as carefully as possible.

Related Courses

Closing the Books

The Soft Close

The Year-End Close

Predecessor and Successor Financial Statements (#198)

In this podcast episode, we discuss the best practices for predecessor and successor financials when a company is being bought out and you have to cut off the financials in the middle of the month. Key points made are noted below.

The Cutoff Problem

The owners of the acquiree may have negotiated an earnout provision. This means the performance of the acquiree has to continue to be tracked after the acquisition, and if it does better than a target level, then the owners get a bonus payment from the acquirer. This is a problem when the cutoff is in the middle of the month, because the former owners only get credit toward their bonus for the second half of the month, and that can cause squabbling over which revenue and expense items to include or exclude. The best practice is to include in the acquisition agreement a statement that, for the purposes of the earnout, that particular month is simply the entire month. That means the official reporting month may be split, but there should be a separate pro forma income statement for that month that combines the two.

Ownership of Working Capital

The next issue is in regard to the working capital that the acquisition agreement assumes will be on the books when the acquirer takes over the business, which is in the middle of the month. The agreement may state that it’s expected to be a certain amount, which is based on an average of what the working capital has been over the past few months. If the actual amount on hand is different from the average, then the amount paid to the owners of the acquiree gets adjusted. The problem is that the amount of working capital can rise and fall during the month, and the amount in the middle of the month could be different from the amount that’s usually there at the end of the month. For example, if a company does a lot of its billings at month-end, its working capital is a lot higher then, because of the extra accounts receivable. In this case, it makes sense to look back over the past couple of months and see if the working capital level has been different during mid-month. If it has, include that figure in the acquisition agreement, so that there won’t be any final adjustment to the acquisition price paid to the owners.

Use of Journal Entries

The income statement for each part of the month has to fairly represent what happened during that part of the month. Which means that there will be a lot of journal entries. For example, there’ll need to be separate depreciation entries, one for the first part and one for the second part of the month. And whenever there’s a supplier invoice that’s intended to cover the whole month, you’ll need to use an accrual to apportion the expense between the two parts of the month.

For payroll, this is like doing a month-end payroll accrual, except that it’s in the middle of the month. This means figuring out the hours that have been worked but not paid to employees as of the mid-month financials, and creating an accrual for that amount as of the mid-month financials. And the same goes for all of the expenses that you normally accrue at month-end.

Most accruals are set up as reversing entries, so that the accounting software automatically reverses them at the beginning of the next month. But in this case the automatic reversal doesn’t work, because the second income statement for the remainder of the month is still in the same calendar month. So instead, all of these mid-month accruals have to be manually reversed within the second half of the month.

If there are any billing situations where goods and services are supplied to customers all through the month and then they’re billed at the end of the month, then you have to create an accrual for the revenue earned through the first part of the month, and then immediately reverse it in the second part of the month.

Inventory Counts

If the inventory records are unreliable, then there has to be a mid-month physical inventory count and inventory valuation.

Required Documentation

The documentation level for this mid-month close needs to be similar to what you’d do for a year-end close. That means putting together account reconciliations for the contents of all balance sheet accounts as of the mid-month close, as well as putting together what is essentially the year-end book for the mid-month financials. The reason for this level of documentation is that there’s been a change in control of the company, and the new owner will want really good beginning records.

Related Courses

Business Combinations and Consolidations

Closing the Books

Mergers and Acquisitions

How to Prevent Over-Accruals (#197)

In this podcast episode, we discuss how to close purchase orders that were not used or partially used in order to prevent over-accruals. Key points made are noted below.

Wait for Supplier Invoices to Arrive

As part of the month-end closing process, you can either wait several days for all supplier invoices to come in, or you can accrue for the expense if an invoice hasn’t arrived yet. Taking the accruals path works if you want to close the books fast, since some supplier invoices might not show up for a week.

Use Three-Way Matching

To figure out the amount of these accruals, have the purchasing department issue purchase orders for all of the expensive purchases. Then, when these orders are delivered, the payables staff matches the receiving documents against the supplier invoice and the purchase order, which is called three-way matching. At the end of the month, see if any received items don’t yet have any related supplier invoices. If they don’t, then accrue them based on the authorized price stated in the purchase order. In the better accounting systems, this is a standard report that the system generates. The report also gives good evidence of why the accrual was made, in case anyone wants to investigate an accrual.

The accrual should be based on receipts for which there is no supplier invoice. This means you need to be careful about the source document being used as the basis for the accrual.

Cancel Residual Purchase Orders

Some purchase orders stay open for months after they’re needed, or there’s a residual amount on them that a supplier can continue to ship against. It’s quite possible that a purchase order was issued because certain items were needed, but then the requirements changed, and no one ever bothered to close it. Or, most of the quantity ordered was received, and there’s still a residual amount that’s been authorized, and which the company no longer needs. A purchase order is a legal authorization to ship, so the company is obligated to pay if anyone ever takes advantage of an open purchase order and continues to ship goods to the company. This can cost some serious money.

The solution is in the purchasing department. Assuming that the purchasing systems are fairly well computerized, there should be a procedure for scanning through the list of open purchase orders in the system every day, to make sure that everything ordered is still needed. If there’re a lot of purchase orders outstanding, then each purchasing agent is responsible for reviewing his own outstanding purchase orders. And if the system is manual, then unfortunately, everyone has to scan through their open purchase order documents.

If a purchase order is closed that wasn’t completely fulfilled, then a closure document should be sent to the supplier, so there’s no longer an authorization to send more goods to the company. Also, keep a copy on file, in case a supplier still insists on sending more goods, and you want to prove your case.

In addition, consider including in the purchase order terms a statement that the purchase order is automatically voided once the designated delivery date has passed, unless specifically authorized by the company. That gives you a blanket termination with suppliers.

Review the Purchasing Manager

One additional item is to include these stray purchase orders in the annual performance review of the purchasing manager. It’s really obvious when there’s a bunch of unused or partially filled purchase orders that have been hanging around for months. At best, it’s bad recordkeeping, and at worst, it represents a liability for the company. And the purchasing manager is responsible for it.

Reporting of Residual Purchase Orders

From the perspective of the accounting department, all you have to do is include a summary of these unfilled or partially filled orders on management reports, so that everyone can see there’s a problem.

Related Courses

Closing the Books

Purchasing Guidebook

Fixed Asset Counting (#196)

In this podcast episode, we discuss the methodology for a fixed asset counting process. Key points made are noted below.

Which Fixed Assets to Count

It’s not absolutely necessary to count fixed assets. In many companies, this is a fairly informal search for just the more expensive assets.

It takes a lot of time to track down every fixed asset, which may not be a productive use of staff time. Instead, focus on just those assets that are more likely to move around. Consider flagging assets that are a combination of movable and really expensive. Then search for these items once or twice a year to verify their locations. This reduces the total fixed asset count work by around 80%.

Who Should Count Fixed Assets

You could shift the counting task over to the maintenance staff, since they can also provide information about the condition of the equipment. Or, have the IT staff count computer equipment.

When to Count Fixed Assets

Schedule the count just before the annual budgeting process, so that any fixed assets flagged for maintenance problems can be included in the capital budget for replacement.

Assign Responsibility for Fixed Assets

Have a program for replacing laptops at regular intervals, and use a policy of giving the old laptop to the employee as soon as a new one is purchased. That means the staff will take good care of their laptops, since they will be the future owners.

Assign each fixed asset to one of the department managers. When they take over a department, they formally sign for every fixed asset in their department. From that point on, they are responsible for all of these assets. If you include the results of a fixed asset review in their performance reviews, they’ll probably take good care of their assets.

Tracking of Fixed Assets

When shifting assets between departments, the department it is leaving needs to file an asset transfer form with the accounting department, which should be verified by the receiving department.

Up-to-the-minute tracking can be accomplished with active or passive radio frequency identification tags. An active tags sends out a ping that is picked up by a tracking system. This is an expensive approach, but can be useful for assets that are used in multiple locations.

Fixed asset counts are a detective control, so they will not prevent assets from being stolen.

Related Courses

Fixed Asset Accounting

Fixed Asset Controls

How to Audit Fixed Assets

Continuing Education (#195)

In this podcast episode, we discuss how to pick continuing professional education courses, and the types of books that practicing accountants should read. Key points made are noted below.

The Accounting Refresher Course

For a refresher on accounting basics, try a college textbook on basic accounting, working through the questions at the end of each chapter. Textbooks are very expensive, so buy one that is one or two editions out-of-date. These older versions are fine for introductory-level accounting, since the accounting at this level does not change much. This may not work for intermediate or advanced-level textbooks, which contain more cutting-edge topics that tend to change more frequently.

Continuing Professional Education Tips

If you are a practicing accountant and just want updates on the most recent accounting changes, take a continuing professional education (CPE) course on the specific topic you need. Before doing so, check with the course provider regarding when it was last updated.

A really large CPE course likely covers many topics at an average level of detail, while a short course covers a small topic in more detail.

Stay away from the low-priced CPE websites, which do a poor job of formatting the courses they are sent by their authors. The more expensive providers do a much better job of editing and formatting the courses.

Look for CPE distributors that curate what they offer. This means that they regularly drop courses that contain older information, and replace them with fresh material. Lesser websites are more likely to offer many courses that approximately cover the same subject.

Accounting Book Tips

The publishers of accounting books may keep them in circulation for a decade or more, so the books can be seriously out-of-date. This means checking the publication date before you buy a book. Even then, the author of a new edition may not have revised information that has gone out-of-date.

Generally look for practical accounting information, rather than theoretical, until you have mastered your job. This means starting at the general level and then working down through more specific topics in greater detail (that is perhaps more industry-specific).

Industry-specific books are easier to find for a large industry, where there are many people working there. This is not the case for a smaller industry, where the potential audience is much smaller.

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Accountants’ Guidebook

CFO Guidebook

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The CFO Career Path (#194)

In this podcast episode, we discuss the career path for a chief financial officer. Key points made are noted below.

Key Requirements of the Job

Being a CFO involves managing accounting, treasury, risk management, strategic planning, and investor relations, but does not require an in-depth knowledge of accounting.

Being a CFO involves a lot of face time, dealing with other managers, direct reports, bankers, investors, and the company president. It also requires long hours, so you may not want this position.

Probability of Attaining the CFO Position

Very few people make it to the CFO position, and even fewer like the job once they’ve made it there. Consequently, you might want to stop in a lower-level position that feels more comfortable.

Educational and Experience Requirements

When in school, arrange for a minor in finance, or a double major in accounting and finance.

After college, one option is to switch out of accounting and go into investment banking. Doing so increases your fund raising experience, which is a major qualification for the CFO job.

Another option is to go into auditing, pile up relevant experience, and jump from there into the CFO job. In particular, do audits for public companies, to learn about public company filings - which is very useful for a CFO. Also, try to avoid niche areas, like nonprofit clients or pension accounting, since they do not help your qualifications for the CFO job.

The other remaining option is to work your way up from within the company, which means starting in either accounting or finance. This is a bit easier from the treasury side, since the main qualification for a CFO is raising money. Consider volunteering for treasury jobs if you are working in the accounting department. Another option is to get a master’s degree in finance at night, while working during the day.

Do not transfer into the investor relations department, since it is too specialized. The only viable option is a short-term assignment into the department to gain experience, and then rotate back out.

Work for a smaller company, and especially a startup. They have very few accounting and finance people on staff, so there is less competition for the CFO job. Also, you can volunteer for all kinds of work to gain experience, like insurance, and loan packages, and budgeting.

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CFO Guidebook

Spreadsheet Errors (#193)

In this podcast episode, we discuss how to deal with spreadsheet errors. Key points made are noted below.

The Nature of Spreadsheet Errors

You rely on a spreadsheet for a long time without really figuring out how it works, and then one day you realize that there’s a flaw, and it’s been churning out incorrect numbers all along. This is a wee bit of a problem if you’ve been using those numbers for journal entries, since that means the financials are wrong, too.

The worst case I ever saw was a small company that had been using an incorrect spreadsheet to figure out how much overhead to allocate to their inventory. When the auditors came in at year end, they threw out almost all of the inventory asset, which wiped out the company’s net worth. So there you go. This sort of thing can be critical.

So why do we create complicated spreadsheets? Some of the time, it’s because the accountant who created them was incredibly detail-oriented, and so he just kept on expanding and expanding it, and next thing you know, it’s a full-time job to maintain a spreadsheet. The person might even take pride in having created one of the seven spreadsheet wonders of the modern world. Unfortunately, that’s a pretty common personality trait in the accounting profession. It’s just the way we are.

Justifications for Complex Spreadsheets

I can think of only one situation where a really complex spreadsheet might be justified, which is if it contributes toward billing a customer for more money. For example, there might be a cost reimbursement contract, so the more cost you can allocate to a certain customer’s job, the better. And that might require some complexity. I once ran across someone whose entire job was using massive spreadsheets to allocate the overhead costs from an airline reservation system, so that the company could bill the supporting airlines as much as possible for it. OK, I can go with that as a justification, but I certainly wouldn’t want to have that job.

So let’s just say that there are a few good reasons for spreadsheet complexity, and a whole lot of reasons to have simpler systems. Let’s go with option number two, and see what we can do with it.

Spreadsheet Best Practices

Now, the worst case of spreadsheet errors is probably going to occur when a different person takes over a spreadsheet. This would be a good time to force the new person to dig right through the spreadsheet, figure out how it works, and then present it to someone who’s more experienced. Until they can defend the spreadsheet, they’re considered to be temporary in that job, because they don’t know how it works yet.

You could go a step further, and force them to write up the essentials of the spreadsheet in a document. That document can then go into the department’s procedures manual, which would be great if the auditors ever need information about spreadsheets.

The problem with that advice is that someone only reviews a spreadsheet at long intervals – when there’s a job change. To compress the review process a bit more, put a spreadsheet review on the department schedule at pretty long intervals – maybe once every year or two, and do it during a slow part of the year, so it won’t be skipped.

When scheduling these reviews on the calendar, pay particular attention to any spreadsheets that directly impact the financial statements. In other words, if a spreadsheet has the potential to really screw up the company’s numbers, review it before the end of the year, so that no spreadsheet errors end up in the year-end financial statements.

Another option is to require a complete spreadsheet review whenever you want to make a formula change to a spreadsheet. That means documenting what you want to change, and having someone else inspect the alteration to see if it does what you want it to do. This is quite a bit like a software coding project, where there’s a team review to go over code – except in this case, it’s a spreadsheet.

And another thing. When you want to change an existing spreadsheet, copy the old version to a separate worksheet, and then make adjustments. That way, if the new spreadsheet doesn’t work, you still have the original to fall back on.

When doing any of these reviews, take a hard look at the inputs to the spreadsheets. There’s a good chance that the report the information came from has changed over time, because no one told the person who wrote the report that it was being used as input to a spreadsheet. So if the report changes, that screws up the spreadsheet. And by the way, that also means adding information about spreadsheet inputs to that write-up of the spreadsheet that I mentioned earlier, that goes in the procedures file.

Now, these detailed reviews are way too extensive if you apply them to every possible spreadsheet, since every accountant on the planet has a few dozen of them, if not a few hundred. The point is to conduct a deep investigation on just the really massive or complicated ones. If a spreadsheet is only a simple list, then don’t bother with it.

I’d also like to make a case for the complete avoidance of complicated spreadsheets. When you dig into most types of accounting, there isn’t that much of a need for these types of spreadsheets. For example, keep cost allocations simple, because – why not? Does a slight refinement of an allocation really result in any actionable information? Probably not.

So. When all of these types of reviews I mentioned are going on, part of the dialog should be whether a spreadsheet is needed at all, or at least whether it can be simplified. Accountants being accountants, we all love complexity – but this is one case where I’m not sure we should.

My final word on the matter is that spreadsheet errors aren’t usually considered to be critical – until just after you realize that they’ve been feeding you incorrect results. So the usual approach to spreadsheets is to ignore them, and then have a crisis review, but of only the spreadsheet that was screwed up, and then everything returns to normal – until the next spreadsheet explosion. If that’s the way you want to manage it, just be aware of the downside.

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Cycle Counting (#192)

In this podcast episode, we discuss how to install and use a cycle counting system. Key points made are noted below.

Interim inventory observations are just a physical count of the inventory that happens at any time other than the end of the year. You do an interim count when the inventory record keeping system isn’t giving you accurate results. That could mean there’s a perpetual inventory system in place that really stinks, or there’s a periodic inventory system, and that’s not designed to have accurate inventory records in the first place.

What to Do With Inaccurate Inventory Records

So basically the issue is that the inventory records are inaccurate, and what to do about it. There’re three options. You could guess at the ending inventory balance, which would be based on an extrapolation of the historical ending inventory figures for the past few months. This is generally a really bad idea, because it doesn’t account for all kinds of inventory write-offs that might have occurred, like obsolescence, or theft, or excessive scrap. So estimates of inventory tend to be too high, which means that the reported profit figure is too high.

Your next choice is to conduct a physical inventory count. If you’re going to do this, make them as infrequent as possible, for a couple of reasons. First, you have to shut down the warehouse to do the count. Second, the count involves staff time, and possibly on a weekend, so there’s also the cost of overtime. And third, the result isn’t necessarily all that accurate. The reason is that the people doing the count may not work in the warehouse, so they don’t correctly identify the inventory, or they miscount it.

Even so, there may be no choice, if you don’t want to take the risk of guessing at the ending inventory balance, and there’s no cycle counting system in place yet.

Which brings us to the third option, which is cycle counting.

The Nature of Cycle Counting

In short, cycle counting involves having the warehouse staff do a count of just a few inventory items every day. If they find a mistake, they correct it in the inventory records, so that the records match what they physically see. And on top of that, any error triggers a discussion about why there was an error, so there’s an ongoing investigation into the causes of record errors.

Over time, the number of underlying reasons for record errors goes down, which means that the accuracy of the inventory records goes up. To the point where there’s really no need to do a physical count at all. So that’s the brief view of cycle counting. I’ve installed the system in several companies, so I’ll add some additional thoughts about it.

The most important issue is that the basic record keeping system has to be a perpetual system, which is the one where the inventory records are constantly being updated for incoming and outgoing inventory items. And, the records have to be updated really fast. There can’t be a backlog of transactions that haven’t been added to the inventory records yet.

Otherwise, you get a situation where a cycle counter finds an error, and corrects the database to match what he found, and then the warehouse clerk records a transaction in the system that should have been recorded the day before, and now the inventory records are wrong. So to get around this problem, I suggest giving portable terminals to the warehouse staff, so they can update the records as they move inventory.

The next issue is how to select items for a cycle count. There’re a lot of ways to do it, like counting more valuable items more frequently, or counting items that are scheduled to be needed in production, so you can spot shortages in advance. My approach is the simplest of all, which is basically to start in the lower left hand corner of the aisle furthest to the left, and end at the upper right hand corner of the aisle furthest to the right. And that’s because it’s the simplest. The warehouse staff can do this themselves. Just put a piece of red tape at the spot where they stopped counting the day before, and count another small piece of real estate the next day, and move the red tape forward a bit to mark the new ending spot.

This approach is not fancy, but it’s not subject to much error – unless you lose the piece of red tape.

And actually, I’ve modified the basic system, so that we keep high-turnover items in one aisle, and have the best cycle counter count that aisle over and over again. That keeps any shortages from developing.

How to Do a Cycle Count

Now, how to do a cycle count. Figure out which block of real estate to count, and run a report from the inventory system that lists all of the items in that block. Then take the report over to the cycle counting area, and match everything on the report to what you see on the shelf. That covers half the work. Then you trace everything on the shelf to what you see on the report. The second step is needed to see if anything has been moved into a bin but not recorded in the inventory database – which is really common.

The next issue is figuring out when to do cycle counts. And the answer is, at the beginning of each shift. Once the flood of work hits the warehouse later in the day, it’s a real struggle for the warehouse staff to do cycle counts, so don’t put the pressure on them. Just get it done in the first few minutes of the day.

Another point is to assign the warehouse staff to specific count areas, so when you find an error later on, there’s no question about who’s responsible for it. That way, you can get a competition going among the warehouse staff, which gets pretty intense if you start handing out cash bonuses each week for who has the most accurate area.

The next thing to do is a weekly accuracy audit of the warehouse. This means comparing the inventory records at random to the physical inventory, and then posting the accuracy scores in the warehouse. This really matters to the warehouse staff, especially if they’re being paid bonuses, which I totally recommend.

In terms of progress, it’s pretty slow. The initial accuracy level might only be 10 or 20 percent, and it’s a long ways from there to 100% - which you might never reach. I usually declare victory in the upper 90% range, which could be anywhere from three months to a year down the road.

The Effects of a Cycle Counting System

But the nice part when you get there is that there’s absolutely no need for a physical count. If you were to do a physical count at that point, the accuracy level of the records would actually decline, because of the errors that creep into a physical count.

When the system is really working well, we’ve just printed out an inventory report and handed it to the auditors at the end of the year, and told them to go check our numbers. There was no physical count at all. The funny part was that the warehouse staff knew the records were perfect, so they trailed along behind the auditors – just to gloat when they couldn’t find anything wrong.

So, in short, the ultimate solution is definitely cycle counting, but it might take a while to get there. In the meantime, guessing at the ending inventory balance can be a career-limiting move, so it’ll probably be necessary to do some physical counts. The pain of doing those counts might provide a little extra boost to get going on a cycle counting program.

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The Elimination of Extraordinary Items (#191)

In this podcast episode, we discuss the new accounting standard that eliminates the separate reporting of extraordinary items in the income statement. Key points made are noted below.

The Prior Treatment of Extraordinary Items

The rule used to be that you had to separately identify an extraordinary item in the income statement, net of tax, after income from continuing operations. It was intended to strip away all extraneous items from the core operating results of a business, to see how well it was really doing. An extraordinary item was something both unusual and infrequent, and typically involved a large loss.

The Elimination of Reporting for Extraordinary Items

By eliminating this reporting requirement, we are showing a more comprehensive picture of outlier transactions that still impact a business. Realistically, we should be putting more items into the body of the income statement, to show the full range of financial results. This means adding back the results of discontinued operations, and putting fewer items in other comprehensive income.

This change in the accounting standards does not apply to IFRS, since the IASB never adopted the separate reporting of extraordinary items in the first place.

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The Intern Experience (#190)

In this podcast episode, we discuss the auditor intern experience. Key points made are noted below.

Intern Work Periods

Winter interns work from January through March, while summer interns work from June through August. Internships last a minimum of eight weeks, and may run to 11 weeks.

Intern Activities

Interns are treated as regular staff, and are expected to prepare work papers, perform procedures, and respond to review notes.

Winter interns typically work on year-end audit engagements, while summer interns are more likely to work on benefit plans.

Interns work on lower-risk cycles, such as auditing cash, fixed assets, and employee compensation. Could assist with revenue testing.

Converting Interns to Full-Time Work

The intern will receive a job offer on the last day of the internship, based on his or her performance. There is an internal evaluation process for this.

You get the summer off to study for the CPA exam, so full-time work starts in the fall.

The intern experience is helpful, since you already have some expertise when starting full-time work, have used the firm’s audit tools, and may be assigned to the same clients.

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Accounting for Acquired Intangible Assets (#189)

In this podcast episode, we discuss the new accounting standard relating to the accounting for intangible assets in a business combination. Key points made are noted below.

The Amortization of Goodwill

If you elect to amortize goodwill, then there is an option to stop separately recognizing some kinds of intangible assets. The first kind is noncompetition agreements. The second kind is customer-related intangible assets, unless they can be sold or licensed – which is unlikely. It is difficult to place a value on these types of assets, which means that someone reading the balance sheet of a company that has recognized these assets tends to ignore them. In short, no one thinks they’re real assets.

Rules for the Treatment of Acquired Assets

Under the old rules, if your business acquires another entity, it’s usually necessary to bring in a valuation expert who figures out what these intangible assets are worth. Then you record these manufactured assets as separate assets, and amortize them over time. And the outcome is just a number that’s stuck on the balance sheet. No one really cares if you now have an asset called customer relationships that’s worth a million dollars. In short, the acquirer pays a lot of money to create an unusable asset.

With the new standard, these types of intangible assets are shifted back into goodwill, which is probably where they should have been all along. And once they’re in goodwill, they’re subject to the standard amortization period, which is ten years or less.

The new standard does not apply to existing intangible assets. So any of those intangibles that are already on the books have to stay there, and you should continue to amortize them.

There is not much of a downside to this new standard. A private company will now spend less money on valuation experts, the accounting staff will spend less time tracking intangible assets, and the balance sheet will look a bit cleaner.

However, if there’s any reason to believe that a privately held company is going to go public in the next few years, then avoid this option. Since it only applies to privately held companies, going public means that you’d have to recast prior financial statements to include those intangible assets that you’ve previously avoided.

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Advising Management (#188)

In this podcast episode, we discuss how the accountant should give advice to management. Key points made are noted below.

Focusing on Key Issues

Decide upon just a few key concepts that can really help the business, and focus on educating the management team about why these items are such a good idea. This means keeping the number of concepts low, such as just one or two.

How to Talk to Management

Next, spend a few weeks figuring out how to communicate the selected concepts. This could be a presentation, or might involve the use of a consultant. Continue to make your case over a prolonged period of time, using multiple methods, and talking to people throughout the company. Using continual repetition makes it easier to drive home the message, and they will really understand what you are talking about.

When taking this approach, be politically correct, rather than annoying because of all the repetition. When to push and when to back off is a judgment call.

Subsequent Activities

When management finally agrees with you, continue pushing to ensure that the concept is woven into the fabric of the company, such as through the use of reporting systems and bonus plans. Only after this is done can you move on to another project.

If management simply does not want to listen, then your choices are to stay or to leave. If the job is a good one, it could be acceptable to stay for a while, and just work on improving the accounting department. This bolsters your resume for a move somewhere else. However, the long-term prospect is to look elsewhere for a better job, where your efforts will be appreciated.

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Cash Forecasting Accuracy (#187)

In this podcast episode, we discuss how to improve the accuracy of the cash forecast. Key points made are noted below.

The Need for a Cash Forecast

The company controller or bookkeeper might think that the main work product of the accounting department is the monthly financial statements, and that’s generally true. However. In a smaller organization, the accountant is also asked to create a cash forecast, which probably comes out once a week.

The management team depends on that forecast to figure out how much they can spend, and invest, or need to fund raise. So, what’s their opinion of the accountant’s skill level if an inaccurate cash forecast comes out every single week?

Cash Forecast Accuracy Enhancements

And that’s why we need to focus on improving the accuracy of the cash forecast. There’re a couple of good techniques for gradually improving the forecast. The first one is to limit the time period over which there is a forecast. If you’re really shooting for a high level of prediction accuracy, only forecast for one month out. Within that time range, you can use the company’s existing aged accounts receivable report to estimate when cash is coming in. The same goes for the aged payables report for predicting when cash goes out. Beyond one month, you’re guessing at the amount of sales that will be generated and you’re guessing at the amount of payables. So basically, there’s an immediate accuracy drop off one month out.

If the management team really insists on a longer prediction period, then go ahead and give it to them. But do some re-education regarding what I just said, so that they understand the issue. And on top of that, put a thick vertical line down the cash forecast that separates the first four weeks of cash forecast from anything coming after it, so there’s a built-in reminder that everything to the right of that line is suspect.

Next up, improve your accuracy within that four-week forecasting period with the 80/20 rule, which is the Pareto Principle. This means individually including in the forecast the 20% of receivables and payables that make up 80% of the cash flows. These items are so big that you have to include your best estimate for each one, or else there’s a major risk that the forecast in total will be wrong. Obviously, that’s a lot of work, but there’s no way to arrive at a high-quality forecast unless you put this kind of effort into it.

As for the remaining 80% of receivables and payables, it’s usually OK to spread it evenly across the four weeks in the forecast.

The next thing to do is install a feedback loop. Keep a copy of each weekly cash forecast, and compare it to actual results as soon as each week is over. This means really digging into the individual cash receipts and cash disbursements, to see where the differences are. And start taking notes. This is where you can really boost the forecast accuracy over time. Chances are, a lot of issues are going to appear.

For example, certain customers have a pattern of paying a little later or earlier than what you expected, or maybe there’s a more general pattern, like all customers paying later when a national holiday interferes with their payment cycles.

Or, you find that certain types of payments were completely missed in the forecast. For example, there may be a property tax payment, which only happens once a year, or a quarterly dividend payment, or annual pay raises went through for an entire department. Or, certain payroll taxes are higher in the beginning of the calendar year, because they’re capped. A couple of actions need to come out of this. One is to start developing an annual calendar of payment events, and mark on it when you expect each event to take place. Review this calendar every time you update the cash forecast.

And another outcome is to start developing a network within the company that feeds you information for the forecast. For example, the corporate secretary knows when the board of directors has approved a dividend. Or, the human resources director knows when pay raises are scheduled to begin, and for how much.

Over time, you’ll gradually figure out the nuances of the cash flows. But even then, there’re always changes going on, so the investigation never stops. Customers change their payment patterns, the company switches to different suppliers who have different payment terms, maybe there’s an acquisition, or fixed assets are purchased. Who knows.

The main point is that you have to maintain an inquiring attitude about the cash forecast, because actual results are always going to differ in some respects from what you thought would happen.

Now, an additional issue is to put into the forecast management’s reaction to the forecast. For example, if there’s a clear cash shortfall projected, then there may be a requirement to hold off on paying certain supplier invoices for a week, or maybe there’ll be a commitment from an investor to give the company a short-term loan. These adjustments need to go into the forecast, which means that issuing the forecast is really a two-stage process. Version one goes out, and then adjustments to it become version two. You should retain version two for comparison purposes when you do the feedback loop.

And a final issue is that, if management issues a mandate to delay payments, that you follow through and make sure that this happens. Otherwise, your own inaction will cause a forecast variance.

So what we need for better cash forecasting is to expand the level of forecasting detail, but only for a four-week period, create a feedback loop, install a calendar of cash-related activities, and set up a network that feeds you information about cash-related events. And make sure that you follow through on any reactions to the forecast.

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Inventory Variances (#186)

In this podcast episode, we discuss the nature of inventory variances. Key points made are noted below.

It can be incredibly hard and very product-specific to figure out a way to count certain types of inventory, and the result may still only be a guesstimate. The cost-benefit of using perhaps dozens of measurement systems to measure different types of inventory may not be very high. You could spend a lot of money to obtain more accurate information about your inventory, but is it worth the cost?

Use Multiple Measurement Techniques

Divide the inventory into clusters and adopt a different measurement technique that is specific to each cluster. Each of these clusters has different unique characteristics. By using clustering, you can reduce the number of measurement systems.

For example, for fertilizer that is stored loose, transfer it into drums or some large bin that has a measurement marker on the side. Then count the inventory by adding up the number of drums or bins, and using the measurement markers to get a rough idea of partial container quantities.

As another example, shift liquids into standardized containers that have monitors on the dispenser valves.

Another option is to weigh smaller containers to judge the amount of their contents.

An option when dispensing alcoholic beverages is to create a preprinted measurement marker label that you can stick on the back of a bottle, showing the increments for each bottle size.

Expect Some Variances

These measurements are not precise, so the related inventory variance may move within a standard range for each of the inventory clusters. For example, fertilizer will compact over time, so the volume may decline by a certain amount per month. This natural amount of shrinkage will probably be quite obvious over time. So, monitor the shrinkage percentage on a trend line and then set a variance investigation threshold based on the historical percentage.

A problem with this approach is that you’re assuming the historical rate of inventory shrinkage is normal. But, if someone has been stealing inventory all along, then that rate of theft is now included within the threshold level, so it will never be spotted. To get around this problem, consult with someone who has a good knowledge of the standard shrinkage rates for these types of inventory.

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Going Concern Disclosures (#185)

In this podcast episode, we discuss having to disclose whether your business is a going concern. Key points made are noted below.

The Going Concern Requirement

The requirement to disclose whether a business is a going concern is a GAAP requirement. The disclosure is needed if there is a substantial doubt about the ability of the company to continue as a going concern within the next year. This is a major issue, since a going concern problem can result in loans being pulled, credit requests being declined, and investors selling off their shares. This is a common issue with startup companies in particular, given their initial financial situations.

Going Concern Evaluation Criteria

Management’s determination of this matter is based on its evaluation of relevant conditions and events that are known and reasonably knowable as of the date when the financial statements are issued. Those conditions and events would mean that the business could probably not meet its obligations during the next year.

Mitigating Events

The disclosure is reduced if management’s plans for the future will mitigate these conditions or events. Examples of these plans are selling off assets to raise cash, selling shares, borrowing money, reducing expenses, or restructuring debt. This option is only available if it is probable that the plans will actually be implemented, and it is probable that the plans will mitigate the issues that have been raised.

Information to Disclose

The disclosure includes the main issues that raised a concern, as well as management’s evaluation of those conditions. Also describe the nature of any plans to alleviate the going concern issue. If there is no way to improve the situation, then the disclosure also has to state that there is a substantial doubt about the entity’s ability to continue as a going concern. If this issue keeps coming up in later periods, then you have to keep on making the same disclosure.

This analysis needs to be done in every interim period, not just at the end of the year. From a practical perspective, it will probably only be addressed as part of the year-end audit for privately-held businesses. A publicly-held company will need to do a quarterly review, since the auditors are on-site to conduct a review every quarter.

Adverse Conditions and Events

Examples of adverse conditions and events are negative financial trends, ongoing losses, declines in working capital, and negative cash flows. Other indications of financial difficulties are loan defaults, being unable to pay declared dividends, having to restructure debt, and being denied trade credit by suppliers. Another area of concern is internal matters, which includes work stoppages, long-term commitments that are not profitable, and being substantially dependent on the success of a specific project. A final area of concern is external matters, which include lawsuits, legislation, loss of a patent, loss of a major customer, and an uninsured catastrophe.

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Internships (#184)

In this podcast episode, we discuss all aspects of being an intern in the accounting department. Key points made are noted below.

Intern Issues for the Employer

Audit firms pretty much always pay their interns, but I keep hearing about other types of businesses only having interns come in if they work for free. I think this is a really bad idea, for a couple of reasons. First, it doesn’t give interns much of an incentive to work hard, and it could put them in a financial bind. Someone still in college really doesn’t have the financial resources to put up with this kind of penny pinching.

Second, it gives interns a bad view of the business. Who wants to take a job offer from a business that’s already proven that it doesn’t want to pay a reasonable wage? And third, it’s probably illegal. The Department of Labor has issued six guidelines for when it’s acceptable to not pay an intern. I won’t get into all of them, but the key items are that someone is not paid if the internship experience is solely for the benefit of the intern, and the employer does not gain an advantage from the activities of the intern.

So unless the employer is really committing to just providing training for its interns, there’s no way that not paying them is legal. So don’t do it. And furthermore, what you really should be doing is the reverse. If you find someone who’s really good, and you want to offer them a full-time job, they’ll be more likely to take the job offer if you paid them a somewhat above-average wage to begin with. This means you value their services.

Intern Issues for the Employee

My first point is to join the accounting club at school, if you have one. When someone comes in from an audit firm or some other business to make a presentation, make sure you talk to them afterwards. My reason for pointing this out is that my wife did this. The speaker was a partner at Ernst & Young, and he called up later and asked if she’d like to interview for an internship. Which she got. So this does work. The point here is that you have an opportunity to make an impression outside of the interviewing process.

Another concern is your appearance. Buy a good suit.

This is not a waste, since you may need it for regular interviews once you graduate, and you’ll need it on the job. You need that suit to get through what I would call the first threshold. Which is, if you’re not dressed appropriately, the interviewer will immediately assume that you’re not serious.

And furthermore, wear the suit for a day or two beforehand, to get used to it. You’re going to be nervous enough in the interview, so don’t make it even worse by not being used to the clothes.

Of course, having just given that advice, I can’t help but point out that right now I’m wearing a polo shirt, Nike track pants, and moccasins.

Anyways, of more importance is to prepare for the interview, so you’re not nervous. My wife did this by joining toastmasters and doing speeches in front of the group. I did it by entering a speaking competition at college, where the prize was to escort a famous businessperson around campus for a day. I got to escort Steve Forbes, who ran for president a few years back.

You can also practice the interview in advance. This means getting someone from the placement office or one of the professors to come up with some boilerplate questions, such as why do you want to work in accounting, and why do you want to work for the company – whichever one it may be. Then get back in that suit, sit in an office chair, and have someone lob those questions at you. And if you don’t get an answer right, then do it again, and again, and again. The outcome you’re looking for is to reduce the number of things that can make you nervous.

Next up, think of a few questions you want to ask them, and memorize the questions.

You need to impress the interviewer with how interested you are in his or her company, even if this is the third interview of the day, and you’re incredibly tired.

Which brings up another point. Don’t schedule more than two interviews per day, and one per day is better. Interviews are exhausting, and you’re not going to make much of an impression if you keep yawning through the second interview. And three interviews in one day is crazy. Don’t go there.

How to Make a Good Impression

Now. You’ve been brought in as an intern. How do you make a good impression, so you can get a job offer in a few months? First of all, look around at the office dress code and do your best after the first day to fit in as closely as possible. This may mean a late night shopping trip after the first day of work, and spending money that you really don’t have. Spend the money anyways. You don’t want to look too casual or too overdressed. The goal is to make clothes a non-issue.

Next up. No matter what they ask you to do, do it. Some items may seem so beneath you that they’re absurd. Do them anyways. The goal here is to reduce the workload of your boss. If your boss’ life became easier because you were in the office, you score points.

So let’s say that a manager comes by and asked you to do some work. What that manager is not looking for is to have you blast out an incredibly fast piece of work and have it back on their desk in an hour. In the accounting profession, the emphasis is on accuracy, not speed. That means you finish the work, take a break, and look at it again. There can be no errors in what you hand back to that manager. If there is an error, what are the odds that the manager will ask you to do more work? Or that you’ll be hired? This is incredibly important. I keep handing out this advice to students, and they keep ignoring me.

In addition, if there’s any kind of social event at all, you must attend. If there’s a night out at the local bar and you have something scheduled already, cancel it. Most interns are only working at a business for a couple of months, so there’s a limited window of opportunity when you can make a good impression. That means being around people as much as possible. If you go home as soon as the work day is over, you’ve just lost an opportunity.

And finally. Ask for more work. There’s no point in sitting passively at a desk, waiting for someone to come to you with a work assignment. Instead, go out and ask for something. Anything. Passive interns are not offered jobs. This does not mean that overly aggressive interns are offered jobs, either. They’re just annoying. Instead, make the rounds and see if there’s anything at all you can do, and be appreciative when someone hands over some work.

And incidentally, most of this advice can also apply to your work anywhere in the accounting field; it’s not just for interns.

Materiality (#183)

In this podcast episode, we discuss whether to make adjustments to the financial statements based on materiality. Key points made are noted below.

How Materiality is Defined (Or Not)

Some potential adjustments to the financial statements are too small to bother with, because they are not material. A common view is that an error can be ignored if it represents less than 5% of net income, because such an error will not alter the investment decisions of someone relying on the financial statements.

However, materiality is not defined in the accounting standards, so that 5% threshold is just based on common usage.

The 5% threshold may not make sense in a number of cases. For example, a tiny upward adjustment in net income could trigger a major bonus payout. Or, a small increase in the reported earnings per share will satisfy analysts, and probably keep the stock price where it is, while a slight reduction could trigger a major sell-off of the stock. As a third example, a modest upward tweak to the numbers allows a company to remain compliant with its loan covenants, while no tweak will cause a loan to be called and the company to collapse. In short, even slight changes in the financial statements could have a major impact.

SEC Materiality Rules

The Securities and Exchange Commission (SEC) has created some rules in this area, which apply to publicly-held companies. The SEC states that you can begin with a percentage threshold, but you must also look at the impact of errors in aggregate. Also, if an error has been occurring for some time, aggregate it to see what the total impact is. A further examination is to see if an error has a significant impact on a subtotal in the financial statements. In all cases, the correction should be made to the financial statements.

According to the SEC, if an error has been going on for a long time, and the cumulative impact has only just become material, then do a prior year adjustment for the errors that occurred in prior years. This adjustment can be made in the next filing of financial statements made by the company, rather than replacing old filings.

It makes sense for a privately-held company to follow the SEC rules, both to create more accurate financial statements and to have the statements compliant if the decision is eventually made to take the company public.

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Accounting Updates (#182)

In this podcast episode, we discuss how to keep up with the latest accounting standards. Key points made are noted below.

Basic Sources of Accounting Information

It’s useful to know where you can get the basic set of source material each year. Generally Accepted Accounting Principles are put out by the Financial Accounting Standards Board in Norwalk, Connecticut, which we refer to as the FASB. And International Financial Reporting Standards are put out by the International Accounting Standards Board in London, which is called the IASB.

Each one of them sells the complete set of accounting standards that they produce; so, you can buy the four-volume set of accounting standards from the FASB from their website, which is fasb.org. You can also buy the two-volume IFRS set from the FASB, though you can also buy it from the IFRS website, which is located at ifrs.org.

Most people simply buy these editions, and that’s all they do. But it’s also useful to know about what’s changing in the accounting standards. If you look at the IFRS books, there’s a section at the beginning of each chapter that lists any changes to the topic. That’s an easy way to figure out if there’re any updates that might impact you. And this may be enough, since there’s usually a year or two delay before a new standard goes into effect. So even though the book may be a few months old, it may contain all of the information that you need.

And by the way, I find that the IFRS books are extremely easy to read, especially since they split off a lot of the supporting material and stick it in volume 2. That means everything you really need is in just one book.

GAAP Research Issues

The GAAP books are not so easy. There’s a status section at the front of each chapter that points out the general topic areas that have been changed, but then you have to dig around to find out what the changes really are.

So with GAAP, the better approach is to go to the FASB website and look up the accounting standards updates on their search bar. We call them ASUs. These updates are a really fine piece of work. You can easily skim down the list of updates and see which ones might apply to you, and then download the PDF file. Each of these documents lists the nature of the change at a summary level, and then it lists the detailed change. They also note how the changes vary from IFRS. I think these are the perfect way to keep up to date on GAAP. Strongly recommended.

This is definitely your best bet for information about GAAP updates.

IFRS Research Issues

Unfortunately, they don’t have the same thing on the IFRS website. If you do a search on the word updates on that site, they give you PDF summaries of their meeting minutes. And I don’t know about you, but I have a lot more important things to do than to skim through those.

You really have two choices for getting IFRS updates. One is to wait for the annual book to be delivered, and just scan through it for the updates. It’s not that hard.

The other choice is to sign up for their e-mail alerts, which is what I do. The trouble is, you may receive a lot of updates, and nearly all of them are just about meeting notifications. That means you’ll have to sort through all of the e-mails to spot anything that might relate to you. I just wish the IASB could adopt the format of the accounting standard updates. Oh well.

One more hint in regard to IFRS is to go to their website and do a search on “Latest File Uploads.” That takes you to a page that contains PDFs of all the most recent publications. The trouble is that most of them are translations, so you may see something that’s actually pretty old – it just happens to have recently been translated into Russian.

A variation on this is to get a free account for the site, login, and then do a search on publication director. This has a bunch of sort options, so you can dig around through a lot of material. But, it’s just not as simple to use as the ASUs.

So in short, bookmark the FASB accounting standards updates page in your web browser, and buy the annual editions from both organizations. That will certainly keep you up-to-date.

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