Technology and the future of Accountancy

Technology has a big impact in accountancy in general and we can see and feel the effects now.

The accounting principles and standards will remain but its application and helpful tools in the real-world setting will be different with what we are used to. Businesses today are employing accountants that are also skilled or at least familiar with accounting information systems and/or enterprise resource planning (ERP) systems such as SAP, Oracle, JD Edwards and others. The introduction of information technology simplified the accounting processes and procedures. 

For example, companies nowadays are using procurement, material management, inventory and sales & distribution modules in their systems. The said modules have the ability to process the transactions and have it connected and integrated in a one common system available to entitled users (database management concept).

On the reporting side, those systems enabled fast and efficient closing of books by providing a customized reporting template including financial statements and management reports, and it aided timely decision-making via dashboards for executive management’s use. 

Clearly, the days of big and bulky journals and worksheets will be totally gone soon and it will be replaced by a paperless accounting system. And it will be tantamount to a lesser bookkeeper workforce but a high demand in computer-skilled accountants. So as accountants, all must be at pace with the upcoming changes.  Yes, accountants must know the IT aspects of their work!

It is also true for auditors.  In audit, possessing skills and experience in technology is considered an edge or advantage. It makes an auditor more competitive and recent.  This is also the observation of a fellow blogger and BusinessWeek’s regular contributor Joel Font, “Gone are the days when auditors could rely on a static set of skills and practices to succeed in their careers. And, gone are the days when most auditors, internal and external, had the good fortune of having job security to the point where they could, over a period of many years, fine tune company specific “routines” that allowed them to remain in their company’s insular (and sometimes provincial) cultures, where bad habits and bad practices went unnoticed and unchecked for decades. As a result of Globalization and market realities, survival for most auditors now depends on their abilities to re-educate themselves quickly and in gaining a strong foundation in the internationally accepted frameworks promoted by organizations like IIA, ISACA, ISO, IRCA and the AICPA…” (more on http://auditjournal.wordpress.com/2009/10/14/auditing-career-how-to-focus-on-high-value-skills/).

However, not all enterprises can afford the very expensive investment in their IT systems. This is the main reason why companies, particularly Philippine companies, opt to adopt a “hybrid” system (I termed it as hybrid because it is partly manual and partly automated) to save costs.  The said hesitations became so popular with IT consulting firms so they find ways to make their expensive products affordable to their target clients.  Just this few months ago, CFO’s around the globe became keen on the so called “Cloud Computing” (Trivia: Google has also availed cloud computing just this month). Cloud computing is like having a “server-less system”. Server-less meaning, no more big chunks of server maintenance expenditures and other server-related expenses in the company’s budget. CFO’s bought this idea in order to prevent cost and maximize savings for their employers. I will be discussing Cloud Computing on my next article.

In this era where information is considered a gem, each of us must be equipped enough to handle the forthcoming developments. The static and “boxed” approach is becoming slowly a thing of the past. We need to embrace the inevitable – that we are getting wired and interconnected.

To summarize, the accountancy profession will be greatly impacted by the future of technology.  If you are still asking “how?”, just think how much Facebook and Twitter instantly became parts of your everyday life.

Let’s talk about risk

Calendar year 2010 is about to close in just a few days and we are about to welcome a new corporate year in 2011. As organizations across the globe set their goals and objectives on the coming year, one little devil can never be set aside. That is risk.

When we hear or read the word “risk”, usual connotation is “unfavorable” or “negative” outcome.  Common reactions ranges from a shrug, to worry and to panic! Why do we react in such manners? Simply because risk is something that we really need to address whether we like it or not.

Defined as the “likelihood of a potential threat materializing and causing an adverse effect in the organization”, risk has many forms. It is something that can affect our processes, people, structure, relationships, and ultimately our goals and objectives as individuals and as an organization. From the definition, it is easy to identify risk. Just think of a threat that may materialize and may negatively impact our processes, people, achievement of objectives/KRAs and you are actually in the process of risk identification.

If you are in finance, typically identified risks are in the areas of investments, tax strategies, liquidity, cash flow, credit and collection and financial planning. If you are from the Information Technology (IT), common risks that need to be addressed, among others, are access rights, system integrity, technology infrastructure, system development, and business continuity. At the top level, strategic risks such as those affecting capital investment decisions, reorganization, divestitures, mergers and acquisitions, and strategic planning are commonly identified.

Having identified those top level and divisional level risks, the next questions now are “how do we address risks?” and “am I responsible for addressing those risks?”. We’ll going to answer that on the next two paragraphs.

The types of risks mentioned above are further broken down into business unit level and process level risks. Process level risks are the lowest level of risk hierarchy and usually are the subject of evaluations such as audit. Process level risks are straightforward and can be addressed plainly by “plugging the leaks” in the systems or process and reinforcement of control actions.

The responsibility for identifying, highlighting and covering risks rest not with our auditors. Risk is everyone’s responsibility.  Gone are the days when we point our fingers at the auditors for the failure to uncover numerous and significant risks across the organization. In the first place, auditors shall not assume risk ownership in every process because doing so would be equivalent to assuming management responsibility and that is a clear impairment of independence issue.

On the other hand addressing process level risks does not fully solve the risk equation. Organizations are being manned by a management team often referred to as the Management and the Board of Directors. This is where the risk consciousness and control compliance must be seriously taken. Why? Because no matter how good your process-level controls are, if your “tone from the top” does not sound good or worse, cannot be heard, it's actually non-sense and automatically deficient.  This is where the Entity-Level Control Concept which almost all control model (e.g. COSO, CoCo, ISO and others) advocates. And these standards are evolving in response to its commitment to address newly emerging risks in the business.

One tax author during my college years said that aside from change, there are other two things that are permanent in this world: death and taxes. He’s grossly wrong. Because as we witness the 2008 financial mess, we were fully convinced that aside from change, there are actually three with risk being the third one.

We all face risks everyday. Risk is inherent in every endeavor. The only state where there is no risk is the state of perfection. Again, nobody and nothing is perfect. This is the inevitable reality we face everyday.

So if we want a fruitful and progressive year 2011, risk should be present at every corporate and individual scorecard.

Merry Christmas and a Happy New Year to all!

IASB and FASB Address new accounting rules on Revenue and Leases Accounting

The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) will commence revising the proposals on Revenue and Lease Accounting after receiving comments from the public on how to converge and redesign the two standards.

Feedbacks came from the technology and construction sectors. Some companies also are concerned about whether the “percentage of completion” method would disappear under the new standard. For leases, most of the concerns points on how the standard addresses lease terms that tend to create uncertainty about the ultimate life or cost of the lease – especially options to renew a lease, contingent rentals, and residual value guarantees.

Companies can expect significant changes next year as the two boards set June 2011 to finalize the two standards.  The two proposals will impact the current standards on revenue recognition (Topic 605 and IAS 11 & 18) and lease accounting (Topic 840 and IAS 17). 

Impact on the US GAAP and IFRS

Revenue Recognition

The Exposure Draft states that “…However, the proposed guidance would differ from current practice in the following  ways:

a.   Recognition of revenue only from the transfer of goods or services - Contracts for the development of an asset (for example, constructing, manufacturing, and customized software) would result in continuous revenue recognition only if the customer controls the asset as it is developed.

b.   Identification of separate performance obligations – an entity would be required to divide a contract into separate performance obligations for goods or services that are distinct. As a result of those requirements, an entity might separate contract into units of accounting that differ from those identified in current practice.

c.    Licensing and right to use – an entity would be required to evaluate whether a license to use the entity’s intellectual property (for less than the property’s economic life) is granted on an exclusive or nonexclusive basis, an entity would be required to recognize revenue over the term of the license. That pattern of revenue recognition might differ from current practice.

d.   Effect of credit risk – in contrast to some existing standards and practices, the effect of a customer’s credit risk (that is, collectability) would affect how much revenue an entity recognizes rather than whether an entity recognizes revenue.

e.   Use of estimates – in determining the transaction price (for example, estimating variable consideration) and allocating the transaction price on the basis of standalone selling prices, an entity would be required to use estimates more extensively than in applying existing standards.

f.    Accounting for costs – the proposed guidance specifies which contract costs an entity would recognize as expenses when incurred and which costs would be capitalized because they give rise to an asset. Applying that cost guidance might change how an entity would account for some costs.

g.   Disclosure – the proposed guidance specifies disclosures to help users of financial statements understand the amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. An entity would be required to disclose more information about its contracts with customers than is currently required, including more disaggregated information about recognized revenue and more information about its performance obligations remaining at the end of the reporting period.

Leases

The proposals in this exposure draft would, in confirmed, result in significant changes to the accounting requirements for both lessees and lessors.

Changes to lessee accounting

US GAAP and IFRSs classify leases into two categories: capital leases and operating leases. Lessees would be most affected if they have a significant portfolio of assets held under operating leases, especially those with leases of property. At present, US GAAP and IFRSs account for the lease payments arising from operating leases by recognizing them in the period in which they occur. The proposals would require lessees to recognize the assets and liabilities arising from those leases.

Although the proposed changes may be less fundamental for leases currently classified as capital assets, they would result in significant changes in the measurement of the assets and liabilities arising from those leases because of the way this exposure draft proposes to account for options and contingent rentals. In addition, the pattern of income and expense recognition in the income statement would change significantly.

Changes to lessor accounting

The proposed approach to lessor accounting would differ significantly from existing US GAAP and IFRSs. Depending on the extent to which a lessor retains exposure to risks or benefits associated with the underlying asset, a lessor would apply either a performance obligation approach or a derecognition approach. There would be no separate proposed approach for leveraged leases.

If a lessor retains exposure to significant risks or benefits associated with the underlying asset, the lessor would continue to recognize the underlying asset and in addition recognize a right to receive lease payments and a lease liability. The lessor would be viewed as satisfying the lease liability continuously over the lease term, and therefore would recognize lease income continuously over the lease term.

If a lessor does not retain exposure to significant risks or benefits associated with the underlying asset, the lease would be accounted for in away similar to the current accounting for capital leases. That pattern of income recognition is similar to the pattern of revenue recognition currently required for manufacturer/dealer lessors. However, there would be significant changes in the measurement of the right to receive lease payments, the recognition of lease income and the recognition and measurement of residual assets. For such leases, the lessor would satisfy the lease liability at the date of commencement of the lease by delivering the right-of-use asset to the lessee and, thus, would recognize lease income representing the sale of the right to use the underlying asset."

Click link to download the FASB drafts

Revenue Recognition http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176156954886

Leases http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176157191432

Three reasons why some CPA candidates fail the board exams

The recently held Philippine CPA Board Exams posted the highest passing rate so far (as of this writing) in the history of the Philippine CPA Licensure examinations. Passing rate is roughly 48%!!!

Some observers attributed this surge in passing rate to the increasing demand for accountants in the Philippines's booming economy and the upsurge in demand for Filipino CPA talent all over the globe. So the PRC-BOA we're seemed to "heed" on this call by lowering the passing cap.

Much of the highlight moments were given to the topnotchers and passers. Now in this blog entry, I want to focus on those who have not yet made it.

In my opinion and observation, many candidates fail the CPA exams because of three things:

1.) Lack of early preparation. The preparation for the CPA Board exams should start at our first day in college. They have been given 4 to 5 years of undergrad preparation but they prefer to spend much of their time playing around.  Thus, they don't have the solid foundation of the concepts. They depend too much on their professors. They limit themselves into what they know about a subject and put into oblivion those subjects or topics that they don't really know. Accounting is essentially a self-study course and requires patience and hardwork.

2.) Failure to focus.  Most of the students/reviewees tend to focus more on extra-curricular activities and they forgot to prioritize their studies. Well, Im not saying that you should not engage into extracurricular activities. I myself was a very active student. I just observed that college studs put more focus on extracurriculars because they love doing those activities. When you asked them they will tell you that their academics is still the priority. It's just a priority in mind and not in appearance. Action speaks louder than words. So focus, focus and focus. Manifest your focus to your goal.

3.) Attitude. This is really where the problem is. Most students feel so miserable when they flunked an exam, laughed at when reciting wrong answers and the so-called, inferiority complex. A positive attitude is tantamount to attaining success. Apply the law of attraction. Think, feel and act like a CPA and you will surely become one.

Can you share your insights regardint this subject matter?

Please feel free to post your comments.

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I so love my PinoyCPA family
Viva cuentados y cuentadas!

-the underdog

Who are required to file Annual Income Tax Returns?

I received a message from a finance officer of a multinational company regarding a question as to what companies are required to file Annual Income Tax Returns.  Let me share below the basic answer to that question. I think this is timely given that we are about to close our books for 2010 and file our taxes on or before April 15.

In accordance with Sec. 232-A of the Tax Code, "All corporations, companies, partnerships or persons required by law to pay internal revenue taxes shall keep a journal and a ledger or their equivalents: Provided, however, That those whose quarterly sales, earnings, receipts, or output do not exceed Fifty thousand pesos (P50,000) shall keep and use simplified set of bookkeeping records duly authorized by the Secretary of Finance where in all transactions and results of operations are shown and from which all taxes due the Government may readily and accurately be ascertained and determined any time of the year: Provided, further, That corporations, companies, partnerships or persons whose gross quarterly sales, earnings, receipts or output exceed One hundred fifty thousand pesos (P150,000) shall have their books of accounts audited and examined yearly by independent Certified Public Accountants and their income tax returns accompanied with a duly accomplished Account Information Form (AIF) which shall contain, among others, information lifted from certified balance sheets, profit and loss statements, schedules listing income-producing properties and the corresponding income therefrom and other relevant statements. "

The above provision pertains to the necessity of audit by an independent CPA on the financial statements of the company that will accompany the Annual Income Tax Return to be filed. The independent CPA will sign on the opinion on the audit report and not on the Annual Income Tax as this is management's responsibility. Normally, the ITR is signed by the Company's President/CEO/CFO and the Finance Manager/Treasurer.

However, in the Philippine setting, the auditor, in addition to the audit of the FS assists the client in the computation of tax payable and proposes adjustments.  He will just attach an "Auditor's Report on the Financial Statements for Filing with the Bureau of Internal Revenue" which attests that there is no relationship by consanguinity or affinity of the auditor to any stockholder of the Company and that the amounts on the schedule of taxes and licenses and valid.

Blangko

Blangko!

Yan ang itsura ng MS Word document na sinusulatan ko nito ngayon. Unti-unti kong sinusubukang  takpan ang blangkong page na ito ng mga salitang tulad ng nababasa mo ngayon. Kapag blangko ang nakikita mo, ano ang naiisip mo? Boring ba? Gulat ka ba? Naguguluhan? O nasisilaw ka sa kaputian ng pahina na tumatambad sayo?

Kung tatanungin mo ako, ang isasagot ko sayo ay, “I feel empty”.

‘Lapit na ng pasko ‘pre! Ano bang balak mo? Bibili ka ba ng bagong sapatos, damit, Christmas tree, hamon, keso de bola? Makikipag siksikan ka rin ba sa Divisoria? O kuntento ka na sa Rustan’s ka na lang maglalamyerda? Oo nga pala, may Christmas bonus ka na! Libre naman jan pre!

Libre mo naman ako ng  isang starburaks dyava cheap, pampatanggal lang ng amats ko pre. Nung isang Linggo pa raw akong mukhang lasing sabi  nung barker sa Cubao. Takte kasi yang cartoon pic mania na yan sa FB. Naalala ko tuloy na mukha palang cartoons yung isang teacher ko. Naalala mo ba si Taguro sa Streetfighter? Yung kalaban ni Eugene? Oo yun nga! Tanga wala sa streetfighter yun! Nasa Ghost Fighter kaya un. Bobo mo talaga ‘dre! Paturo ka nga kay Kuya Jobert! Aligaga ka rin eh.

Peace Yo!

Sensya na dude medyo di kasi ako OK ngayon eh. Tanungin mo ko kung bakit. Sabihin mo “Bakit?” Game… 1…2…3….. Eh hindi mo naman sinasabi eh. Game na kasi. 1…2…3… $%#^&*&@

Yan! Dyan ka magaling. Kaya ka iniwan ng GF mo di ka raw kasi marunong manghula. Putek! Alam mo ba na kapag sinabi ng babae na “Ok lang” ibig sabihin nun “Oo. Gusto ko yan”. At kapag sinabi niyang “Bahala ka na nga!” ibig sabihin nun “Sundin mo ang gusto ko”.  Tsk tsk… Kelangan mo talaga ng psychic powers! Bili ka pare marami na nagkalat na ganun. Samahan kita. Bili tayo Quiapo balita ko meron daw outlet dun si Hayden Kho.

Nga pala, may nanalo na ng Php 740M sa lotto. Lucky Pick pa nga pre eh. Swerte ng nanalong yun. Pasalamat siya hindi ako nakataya nung araw na un kundi may kahati siya. Kung sakaling nanalo ako, pre unang una kong bibilihin lam mo kung ano? Bibili ako ng common sense at ipamimigay ko sa lahat ng Pilipino lalo na kay Glenn. Takte na yan! Hanggang ngayon sumasakit ang bangs ko araw-araw at umaabot na hanggang eyebrows.  Nakakatakot baka lumala ito at maging Bangs Cancer.

I wonder why common sense is so uncommon nowadays. Sabi ni manong drayber, dahil daw yan sa hindi nanalo ulit si Erap. Dahil kundi raw sana na-impeach si Erap at kung nanalo sana nung nakaraang eleksyon, maunlad na sana ang Pilipinas at… at… (sorry ‘pre di na nakapagsalita si manong. Di ako nakapagpigil eh. Nilunod ko ng diesel kanina habang nagpapakarga kami sa Shell).

Anyways, nakakatuwa isipin na naimbento ang Facebook. Dahil sa Facebook, nagkikita ang mga matagal nang nagkalayo. Mga dating mag-classmates, kababata, kapitbahay, ka-text, ka-sex, kabit, kakosa, kaaway, kalaro ng Chinese garter, ten twenty, shagidi shagidi shapopo, pitik-bulag, pitikan etits, pik pak boom, boom taya taya, at plak shomelin bom bom chenelyn! (Bet ni watashi wititit ma-translate lalu ng mga mudak bekimon itey).

Bakit ba hindi ako makatulog nang hindi ko nabubuksan ang FB ko?  At kapag nabuksan ko naman, naiinis lang ako kasi puro games at walang katuturang apps ang nakikita ko. Tapos may mag aadd saken na di ko naman kilala. Tapos kapag hindi mo binigay ang number mo, ikaw pa ang isnabero. Tapos makikita mo ung dati mong kaibigan na kausap ka lagi, ka-PM, ka-YM, na bigla na lang tumaas ang tingin sa sarili mula noong naging cover girl ng FHM! Hindi na ako bumili ng FHM mula noon. Bakit ka bibili pa eh ang dami namang nagkalat sa internet!

Wait lang… (higop muna ng kape… kagat ng cheese muffin… nguya-nguya…lunok) Yan ok na ko. Go!

Kainis tong mga bebot na to sa Forever 21. Di man lang ako pinapansin! Tong koreanang nasa kanan ko naman sarap batukan eh parang may kung anong nakabara sa lalamunan at hindi mabigkas nang tama ang mga pangalan ng mga coffee variants habang umoorder.  Kung taga North Korea lang ako malamang pinaulanan ko na ito ng missiles eh! Sakit sa bangs!

(inom muna ulit… lapit na maubos ang kape ko…)

Teka, nasa page 2 na pala ako hahaha! Hindi na blangko ang pahinang ito. Wuhooo!!! Ibig sabihin nadagdagan ng ilang kilobytes ang word file na ito at nagsayang ako ng mahigit Php 200 para sa kape at muffin. Para makatambay lang dito sa coffee shop na ito.

Para makapag sulat ng isang walang kakwentan-kwentang blog entry na ito na ngayon ay binabasa ng mga taong maaaring walang alam kung mamaya ay buhay pa ba ako… =(