Today’s accounting department must not only deal with the collection of financial information, but has to deal with non-financial information, controlling, IT and process topics to demonstrate that valid, meaningful data can be provided to various stakeholders. The increasing complexity should lead to more transparency, but accounting departments have to adapt to the new requirements. Let’s have a look at the accounting trends.
Financial information remains the pillar of accounting
While the cash flow orientation has always been important in business valuation, the focus in classical accounting has shifted to valuation criteria in order to be able to present a true and fair view of the situation of a company. However, the focus on cash flows would have several positive effects for accounting: Monthly accounting could be carried out more quickly because the focus is on the complete document entry and not on the valuation of individual balance sheet items. The liquidity situation will be shown more transparently and the accounting system will generally focus on the current situation of the company and not on future developments.
The cash flow orientation has the following positive effects for a company:
- Reduced complexity and more transparency by considering cash flows
- Less valuation and more cash flow orientation and thus focus on the existing liquidity (and not the future value)
- Reduced risks and more clarity in operational management
- Less time is needed for the monthly closing, which at the same time becomes more relevant for liquidity planning.
Planning and reporting in all imaginable dimensions
Planning, and thus controlling, is becoming increasingly important for accounting in order to be able to react quickly to changes, for example. A company’s planning systems should take internal data and external developments into account in order to be able to assess the many possible developments of a company. The following points should be observed:
1) Show trends that have an impact on the future
The quality of planning can be increased by identifying trends relevant to the company and working out their impact on the company. What is relevant must be decided individually for each company (parameters can be: financial impact, risk, social impact, impact on a location, etc). The trends help to derive a possible or probable future development and should be considered in the different planning methods. E.g. rolling forecast or scenario analysis, etc.
2) Explain history
Understanding the past helps to plan the future. Therefore a Management Information System (MIS) should be used as a starting point for planning. A good MIS or reporting system covers the information needs of different stakeholders.
3) Providing information relevant to decision-making
The planning should serve as a control instrument and prepare decisions in an action-oriented manner. The planning of only financial key figures should be avoided. All value drivers of a company should form the basis of the planning and measures should be evaluated and discussed.
4) Planning calculations can serve as a means of communication
Planning can support corporate communication or provide data for it. Therefore a largely self-explanatory description or presentation is necessary.
The planning process should consider the following points:
- Real-time processing of actual data
- Business Intelligence as supporting software
- Financial and non-financial data should be considered equally
- Business Plan, Budget, Forecasts, Business Cases: Use of all planning tools
- Focus in planning on the value drivers of the company including external factors
- Scenario Analysis
Governance and compliance as the backbone of the company
Today, the management of finance and accounting is increasingly called upon to make the processes in a company “compliant”. This includes, for example, data collection for new customer investments (determination of beneficial owners, passport copies, KYC, etc) as well as the definition of control steps for critical business processes. It is necessary to define an adequate form of organization with appropriate rules and to ensure that the company does business abroad within the framework of the applicable laws. The processes can, for example, be anchored in a document management system, which is based on pre-defined checks and balances.
Compliance-relevant topics are thus securely anchored in processes and ensure uniform handling. The finance and accounting department can usually help develop the following topics:
- Further develop governance
- Ensure compliance in finance and accounting (4 eyes principle, etc)
- Review and document internal controls
- Provide support for specialist departments
Non-financial information is becoming increasingly important for accounting
The demands on accounting are becoming more diverse and knowledge about the accounting of non-financial information is increasingly in demand. This comparatively young legal matter is characterized by a large number of new guidelines and developments, all of which, however, are generally aimed at simplifying existing rules and increasing transparency. Some of the relevant guidelines are presented below.
EU Directive on the Disclosure of Non-Financial and Diversity Information
At the end of 2014, the European Commission adopted Directive 2014/95/EU, which requires large companies to include a non-financial statement in their corporate reporting.
The disclosure standards oblige certain companies to report non-financial information and corporate reporting is changing from pure financial reporting to extended reporting, which equally requires the consideration of non-financial information in accounting. Certain large companies, regardless of their industry, are required to make a non-financial statement that includes, as a minimum, information on environmental, social and employee concerns, respect for human rights and the fight against corruption and bribery. It is hoped that the sustainable principles are incorporated into a company’s business model and integrated into performance management.
In order to meet these requirements, companies have prepared themselves to adapt their internal and external corporate reporting by creating appropriate content and reporting in a way that is audit-proof. This non-financial statement includes a description of the strategies, results and risks related to these issues and be included in the management report or a separate report of the company. In addition, a company must include comprehensive statements on the impact of the company on its environment and extend this to the extended supply chain. In particular, the following information must be included:
- a brief description of the undertaking’s business model;
- a description of the policies pursued by the undertaking in relation to those matters, including due diligence processes implemented;
- the outcome of those policies
- the principal risks related to those matters linked to the undertaking’s operations including, where relevant and proportionate, its business relationships, products or services which are likely to cause adverse impacts in those areas, and how the undertaking manages those risks;
- non-financial key performance indicators relevant to the particular business.
In addition, a description of the diversity strategy pursued in relation to aspects such as age, gender, educational and professional background.
Global Reporting Initiative
The sustainability report is the main medium of a company to communicate economic, environmental, social and leadership issues. The GRI guidelines are characterized by clear regulations and has brought the following improvements and innovations for sustainability reporting in particular:
- User-friendliness for new and experienced reporters through clear definitions
- Focusing on the essential aspects of a company in order to report information that is essential for companies and stakeholders in the future. “Focus on what matters, where it matters! This is intended to make reports more strategic, more focused and at the same time more relevant and easier to read.
- Two options for reporting in accordance with the GRI guidelines that differ in scope: “Core” (core option) or “Comprehensive” (comprehensive option).
The report addresses internal and external stakeholders in order to explain (sustainable) positive and negative effects of a company in economy and society. The regulations represent a simplification for reporters and report readers, as they provide more focused and relevant information on the key issues.
Corporate Water Disclosure Guidelines
The Corporate Water Disclosure Guidelines were developed by the Pacific Institute with the collaboration of PWC, CDP (Carbon Disclosure Project), WRI (World Resources Institute) and GRI (Global Reporting Initiative). The guidelines are designed to measure and evaluate a company’s water use and to understand the challenges and opportunities associated with water use.
Disclosure of this information can provide a better understanding of the company’s water-related risks and opportunities and their impact, and through a continuous improvement process and stakeholder engagement process can enhance the company’s reputation and increase investor confidence.
Other important guidelines are:
- AA 1000 Stakeholder Engagement Standard
- GHG Protocol Corporate Standard
- International Integrated Reporting Council
- UN Global Compact
Organizational anchoring of data collection of non-financial information
The main challenges for internal accounting are data collection and data consolidation. Furthermore, GRI reporting obligations often go beyond the financial consolidation scope, as the reporting boundaries often have a broader scope (e.g. when including suppliers). Also the calculation of GHG emissions often do not correspond to the financial consolidation scope.
It is undisputed that the know-how for data collection and data analysis has been built up in the accounting departments over centuries. However, the accounting department must develop its skills from a pure financial management to an integrated view that processes financial and non-financial information equally.
While in finance and accounting, financial information is still the main data provided by the department, non-financial information will become increasingly important in the future. To reduce complexity it is helpful to focus on cash flows, but at the same time to improve the planning and process quality of the department. The planning should consider financial and non-financial information and the business measures derived from the planning and strategy should be reflected in the business processes. Contact us to redesign your accounting processes (and make them future proof).