Ring in the New Year with Accounting Cheer - Avoid the Year End Chaos
There is something about year ends that makes us extremely emotional. It is a time to reflect upon the year gone by and make commitments with renewed vigour for the year ahead. For businesses, it is also the time to take stock of financial accounts and align all business interests. This, as we all know, is easier said than done.
The challenges are similar for most business across the world and can pertain to both internal land mines as well as compliance with regulatory requirements. Some of the pain points are closely associated with manual oversight while others pertain to complying with the key differences in the approach determined by the GAAP (generally accepted accounting principles) that is being applied, i.e. IFRS (international financial reporting standards) or local GAAP or US GAAP.
A close examination would indicate that most of the internal issues start earlier in the financial year and get magnified by year-end. These usually stem from:
- Financial surprises during year-end review
- Delayed or incorrect data
- Smaller issues which could have appeared during the monthly or quarterly close, but had not been discovered until year-end
- Communication gaps amongst teams
Companies that operate in multiple jurisdictions have to additionally contend with preparing both group as well as local financial statements. For such companies, the challenges primarily stem from identifying the substance as well as the form of economic transactions. Local rules can vary significantly and what might be in compliance in one jurisdiction might be lacking in another. For example, the scope of provisioning in the Netherlands is different from the provisioning requirements in Germany and Italy. The former allows a provision to be made even if an obligation does not exist, while in the latter countries, the risk areas covered by provision are larger. In China, individual branches of companies are subject to virtually the same level of compliance obligation as a local headquarters, even if they are not separate legal entities. In HongKong, on the other hand, a private company which has applied for a dormant status (i.e. a company that has no relevant accounting transactions during a financial year) under the Companies Ordinance is altogether exempted from filing annual returns.
There can also be significant differences in the contents of the financial statements and the level of disclosures required. For example, in France and Germany, cash flow statements are required to be prepared only for consolidated accounts or enterprises listed in capital markets whose financial statements follow the IFRS while other jurisdictions like the Netherlands, Italy and Portugal have done away with the requirement of a cash flow statement.
Local rules can vary greatly and such differences combined with internal inefficiencies can have a significant impact on both local as well as group accounts. These issues can mount through the year and cause unwarranted stress at year-end.
Navigating the legal and tax quagmire is no easy task. Which is why companies should adopt a proactive and consistent approach that can make the year-end closing process smoother and less edgy. Close communication and coordination amongst teams is fundamental to this. Instead of working in silos, legal, accounting and finance teams should regularly communicate and ensure that local as well as group compliance requirements are being met.
The year-end Framework
The bottom line is that planning and operating proactively for the year-end is a best-practice approach for success. This can help companies save cost as well as time and focus on what they do best i.e. building a business. Looking forward instead of concentrating on the rear-view will ensure a smooth and successful journey ahead.
The Englobally Group
The Englobally Team is present across the major regions of the world and is focused on helping firms build as well as expand their businesses, beyond geographical boundaries. Our in-depth local knowledge and expertise and personalised solutions ensure that we become trusted long-term partners to our clients. Contact us to know more about us and understand how we can add value to your business.