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