1. Accounts Payable
and Receivable
Accounts is the key information generator in any
commercial organization, it is the basic data recording technique that enables
decision makers to gain access to data that can be analysed on various
parameters and then utilized to as INFORMATION, and in order to do so the data
input method has to be not only error free but also needs to be a predefined
format to capture all aspects that shall translate it into a meaningful
arrangement that shall serve its purpose. And for same ABC3M shifts
focus from Financial Accounting to Cost Accounting or rather towards Management
Information System by use of Technique Manufacturing Accounting. Manufacturing
Accounting is tweaking financial accounting into more detailed accounting
process where each transaction recorded translates into information that can
provide details about Business Process relating to that transaction and records
not only the historic cost element but perpetuating effect and cause benefit
relationship behind decision pertaining to that transaction. For example when
Financial Accounts follows Historical Cost Method for Valuation of Inventory
(FIFO) the Manufacturing Accounting proposes to use Current Replacement Cost
and requires effects of same to be recorded into Books with immediate effect to
have clear Financial Understanding of Books, To illustrate further lets discuss
two sides of this transaction, If Goods are purchased on X day at Rs 100 and
Prices of same rise on X+1 Day by Rs 10 then Closing value of same on X+1 Day
will be Rs 110, but the unrealised profit of same has to be charged to Profit
and Loss Statement by reducing profit by Rs 10 and needs to be shown in books
of accounts as separate line Item as Unrealized gains. And here lies the
problem; Accounting Convention and Accounting Standard dictates that no such
Unrealized profit can be accounted unless there is certainty that such sale can
occur at Rs 110 and another important aspect AS 2 specifically requires that
Inventory has to be shown at Historic Cost or Market Value Which ever is Low
and the Profit has to be adjusted accordingly. Now management has to now its
capacity to generate money in near future by sale of such inventory and if they
see that less amount can be realized through Inventory Sale they might make
decision that can lead to wrong decision regarding Purchase or Production
Scheduling and for same they need to have details of Quantity, Quality and
Realizable Value of Inventory in hand. This is where Financial Accounting falls
short, as it provides information based on inputs and most of accountants
follow the data recording method derived from Accounting Standards they cannot
capture true incense information required by management,
Another Aspect is Record Keeping as per needs of regulators,
In our country Accounts are needs to be kept as per Business Requirements, also
as per Companies Act and also as Per Tax Accounting Standards, and Most of
Companies keep it as per Tax Accounting Standards to avoid duplication of work
and to avoid mismatching of data, This Leads to inadequate information for
Decision Makers as Data is not adequate to make decision, And of a Separate Set
of Data is needed to be maintained for Management Decision Making Purpose that
increases work load in all departments as well as increases work of
reconciliation between all departments and its validation through Accounts
Department.
ABC3M proposes to address this issue by simply
following Manufacturing Accounting as per Costing System of Company, This has
particular advantage of real time decision making matrix availability across
all functions as each function has to propose transactions as per there own set
of requirements they pass on information for to authorized person in the form
which allows its recording into a cost accounting record which also provides
recording of its impact into financial records as per needs of regulators like
Tax Authorities and others.
To Understand this in detail we are going to carry out
detailed questionnaire based on Accounting Standards linked with Costing to
help Accountants and Directors to understand the relationship between all
transactions and its impact and severity of impact on Key Aspects of
Profitability and other Decisions of Company like Capacity Building and Market
Share etc.
The Exercise will be first List of Transactions Covered into
Each Accounting Standard and the List of Decisions Linked with Transactions and
Requirements of MIS with that decision and how Manufacturing Accounting will
treat same and subsequent accounting treatments required for balancing the
Financial Accounts with Cost Accounting will be listed. This will also create
basis for catalysing BOD to understand key decisions to be made and there
frequency to enable them focus more on KEY BUSINESS OF COMPANY rather than desirable
aspects of running company.
Accounting Standard 1 Disclosure of Accounting Policies
This Standard deals with Selection of Accounting Method by
Company and Its Conformance with Generally Accepted Accounting Principles and
Conventions, As Most of the world requires a uniform method of accounting to
have clear understanding of performance and comparability between two similar
sets of information it requires the complete disclosure of method of accounting
selected and if there is any deviation from common practices that needs to be
disclosed separately so user of information can make his decisions based on
effects aroused due to such deviation and can understand more about the
company. Most of such deviations are covered in subsequent Accounting Standards
and hence we will revisit the AS1 again after completion of this part.
Accounting Standard 2 Inventory Valuation
In Operations of Company most significant operation is Sale
of Goods/ Services that translates into Monitory Rewards to Company, Hence to
achieve sale most important part is Actual Change of Hands of Goods/ Services
involved, And that means whole Value Addition Happens when actual movement of
Goods/ Services happen, thus it is important that this transaction shall happen
in most efficient way to achieve objectives of company i.e. Achieve Profit,
Increase Market Share, Develop Brand, Create Opportunity for Subsequent Sale,
Have long relationship with users, Create Value Proposition for User.
Now this Value Creation for User can be:
Cost Leadership, Perfect Operation, Reduction in Overall
Operating Cost, Display of Wealth, Completion of Desire, Projection of Might or
Simply Reduction in worry, And for same they have allowable Budget based on
Comparative Products, Replacement Products, Alternative Products or change in
Utility or reorganizing work flow or compromise and in any such aspect utmost
important factors are Price, Position, Utility, Timing, People, Place, Product
(7 P of Marketing) and then this leads to introspection of service provider – Goods
Supplier company and that translates into Decision relating to Inventory are:
·
Level of Inventory to be managed
·
Cost of Inventory Management
·
Valuation of Inventory
·
Working Capital Decisions Relating to Inventory
·
Effect of Inventory Management with Competition
Management
·
WIP Valuation for Operations Management
·
Production Scheduling and Inward Supply Chain
Management Linked with Inventory Position and Its Effect on Operations of
Company
·
Forward Contracts relating to Purchases and Sale
of Inventory particularly effects of Macro Economic Factors on Pricing and
Costing of Goods (inwards and Outwards)
·
Distribution and Sales Co-ordination relating to
movement of Inventory and Its Effect on Market Share
And To make all these decisions require information is Value
of Inventory, Potential Change in its Cost, Process Cost to Make goods ready
for Delivery (COGS) and Allocable Portion of OH in COGS and its Classification
and OH Absorption Method and Use of Marginal Cost Method for Making Relevant
Decision.
In order to gather this information accountant needs to
record all these elements in orderly manner to reflect all necessary data in
decision making matrix; making him service provider for all departments and to
achieve same he needs to use technique of Cost Accounting to ensure that all
relevant factors contributing to COGS are recorded at time of Transaction
itself, here we have to understand that it is not just Cost of Purchase and
Expenses Related to Bringing Goods into Factory are essential but also important
are the Expenses needed to convert those Inputs into Finished Goods and Hence
WIP becomes more significant.
In this Process often accountants are not keen on keeping
these records ready due to overlap of Accounting Function with Invoicing Work
and Other Statutory Record Keeping. ABC3M thus suggests to follow
Manufacturing Accounting for same. E.g.
The WIP Valuation is the area where often decision making is
difficult and to resolve same a simple step of Manufacturing Accounting can
solve same. The Transaction is Charging Production OH to WIP, In normal
Financial Accounting OH are charged to P&L Directly reducing the entry for
same, In Costing P&L however the Production OH is First Charged to
Production and then further Accounted for Product or Process.
Explanation:
Normal Accounting Entry:
P&L A/C Dr
To Party A/C
(Being Expenses Recorded for Production By Invoice Dated
--/00/0000)
Party A/C Dr
To Cash
A/C
(Being Cash Paid for Invoice Raised on --/00/000 as per
verification and Authorization done by BOD)
In Cost Accounting Entry:
Production Expenses Control A/C Dr
To
Party A/C
(Being Production Expenses Recorded authorized by Production
in-charge by way of Budgetory allocation under Doc No aa-bb dated 00/00/0000
and Invoiced raised as per PO no aa dated 00/00/0000 authorized by BOD as on
00/00/0000)
Batch xyz/ Product xyz/ Project xyz/ Service xyz A/C Dr
To
Production Expenses Control A/C
(Being Production Expenses charged to Batch/ Product/
Service as per report Submitted by Production In-charge as per Master
Production Schedule Dated 00/00/0000 authorized by BOD and Checked by
Functional Head Mr. xxx with Report of Consumption of Utilities and Inputs
bearing Doc no xx-xx dated 00/00/0000)
Party A/C Dr
To
Cash-Bank A/C
(Being Cash Paid to Party As per Terms of Payment with
Authorization from BOD dated 00/00/0000 bearing Transaction ID xxxx)
Now the Difference is Visible, If First Method Financial
Effect is Directly Visible and Useful when operations are small and Centralized
Payment exists with Very Few Entries to handle, But Situation Changes when
there are handful of Transactions Happening and it becomes more complicated
with Number of Inputs Increases with Complexity of Parts and Number of People
Handling Goods and Even more complexity happens when there are more than 1
Vendor for Each Product and also when there is no standard Product is offered
and each Good/ Service Sold is a variation. In such scenario no Information is
available to BOD in relation to effective use to particular Input which can be
traced backed to Output of Firm and to solve same ABC3M asks
Accountants to get in touch with production rather than with Financial
Statements. The reason for same is quite simple Accounting is RECORDING OF DATA
not DECISION MAKING, DECISION MAKING is Functional Heads responsibility and for
them Accounts is Service Provider and This Service Provider can help best when
Functional Heads Communicate information regarding operations with relevant
Authorizations and in orderly manner with predefined rules to accounts to
seamless transaction processing.
The BOD in turn can have real time information or at least
at every day end the clear financial Position of Company with clarity about
what work priority can be adhere to.
Now the Accounting Part, This Cost Accounting Approach also
effects the Valuation of Inventory, With This Production Expenses Control
Account and Product/Service/ Batch Account the Position of Valuation of WIP is
Clear as Instead of Charging Expenses to P&L now it Direct gets Charged to
relevant Product/ Service and The WIP Valuation is Real, If The Market
Realization Value of WIP at reporting period is Less Than Cost Incurred then it
Can Be Charged to Costing P&L and If Market Realization Value is more then
as per Accounting Conventions the Unrealized Profit is Not recorded at all,
Apart From that The Balance in Production Expenses Control Account Can be
Directly Charged to Costing P&L Reflecting Actual Profit- Loss Position of
Company for Reporting Period (The Balance in Production Control Account
represents Under Absorbed or Over Absorbed OH Amount that needs to be adjusted
for Reporting Period)
This Increases work in Accounting Function but reduces lots
of Waste of Resources in Value Driving Functions as to make it effective clear,
error free and Formatted Data has to be exchanged it triggers Controls and
Observations at each step creating a Log of Information and Authorization
before recording, It also Provides Real time Performance Measurement of respective
department and helps Functional Heads to make Prompt Actions, And Utmost
Important Benefit is reduced Time for Individuals regarding Data Input as
instead of providing unstructured Data they need to fill up only those details
that are necessary for there respective work. This also helps increased
Aggregate Efficiency and Productivity as Incentives are linked with overall
performance rather than individual performance and also requires BOD to Provide
stream lined Activity Schedule forcing them to pay attention to Bottleneck
areas and focus more on people who can perform and make necessary decisions.
Keeping the same principle when Each Expenses Item is
segregated into Cost Centre and then Charging Method is adopted (Control
Account is Created) then the process becomes more effective and helps Functional
Heads to keep track of Operations rather than worrying about recording of
various information.
Accounting Standard 3 Cash Flow Statements
AS 3 Deals Mainly with 3 Aspects of Business:
Cash flow From Operating Activities
Cash Flow from Investing Activities &
Cash Flow from Financing Activities
It also pay attention related to FOREX Transactions and
Extra ordinary Items, Dividends and Taxes as they represent stake holders
interest points with regards to Validation of Financial Position in Real Cash
Basis.
The Line Items of these Cash Flow Statements are Pure Cash
Outcome of All Decisions made by Executives of Company and can be seen in Money
Value by any person carrying commerce
The Items of same represent Following Transactions:
Operating Activities
Cash flows from operating activities are primarily derived
from the principal revenue-producing activities of the enterprise. Therefore,
they generally result from the transactions and other events that enter into
the determination of net profit or loss. Examples of cash flows from operating activities
are:
(a) cash
receipts from the sale of goods and the rendering of services;
(b) cash
receipts from royalties, fees, commissions and other revenue;
(c) cash payments
to suppliers for goods and services;
(d) cash
payments to and on behalf of employees;
(e) cash
receipts and cash payments of an insurance enterprise for premiums and claims,
annuities and other policy benefits;
(f) cash
payments or refunds of income taxes unless they can be specifically identified
with financing and investing activities; and Cash Flow Statements
(g) cash
receipts and payments relating to futures contracts, forward contracts, option
contracts and swap contracts when the contracts are held for dealing or trading
purposes.
Investing Activities
The separate disclosure of cash flows arising from investing
activities is important because the cash flows represent the extent to which
expenditures have been made for resources intended to generate future income
and cash flows. Examples of cash flows arising from investing activities are:
(a) cash
payments to acquire fixed assets (including intangibles). These payments
include those relating to capitalised research and development costs and self-constructed
fixed assets;
(b) cash
receipts from disposal of fixed assets (including intangibles);
(c) cash
payments to acquire shares, warrants or debt instruments of other enterprises
and interests in joint ventures (other than payments for those instruments
considered to be cash equivalents
and those
held for dealing or trading purposes);
(d) cash
receipts from disposal of shares, warrants or debt instruments of other
enterprises and interests in joint ventures (other than receipts from those
instruments considered to be cash equivalents and those held for dealing or
trading purposes);
(e) cash
advances and loans made to third parties (other than advances and loans made by
a financial enterprise);
(f) cash
receipts from the repayment of advances and loans made to third parties (other
than advances and loans of a financial enterprise);
(g) cash
payments for futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes,
or the payments are classified as
financing
activities; and
(h) cash
receipts from futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes,
or the receipts are classified as
financing activities.
Financing Activities
The separate disclosure of cash flows arising from financing
activities is important because it is useful in predicting claims on future
cash flows by providers of funds (both capital and borrowings) to the enterprise.
Examples of cash flows arising from financing activities are:
(a) cash
proceeds from issuing shares or other similar instruments;
(b) cash
proceeds from issuing debentures, loans, notes, bonds, and other short or
long-term borrowings; and
(c) cash
repayments of amounts borrowed.
If we read
each line Item, it is essential a Business Decision Relating to Either
Operations or Financial Planning, The FINANCFE Function is more concerned with
same as it expects the Finance to have role in making decisions but again is a
Client of Accounts and Accounts needs to record all these transactions in
manner that the real time use of relevant information can be made, And ABC3M
Suggests that each Transaction listed above relates to a Particular Function
and VALUE ANALYSIS AND PLANNING FOR ACHIVING SAME shall be done by respective
Functional/ Departmental Head and Authorization Resource Allocation shall be
done by Finance Department for same only after Priority List is Prepared by BOD
within limitation of Resources. And Accounts shall Provide Comparable data of
Past Performance and Overlapping or Existing Resources for same through
Manufacturing Accounting, For Example In Financing Decision key aspects are
Benefits arising from use of Asset, Its ROI, Sunk Cost Due change in Operations
or Use, Cost of Finance (Equity and Debt) Alternative Use of Asset and
Available Alternatives of Asset are key decisions, Functional Heads can make
decision about these aspects but the past data of such advantage or effective
use of prior assets can be easily identified with Track of Depreciation and
Amortization Charts if they are maintained in orderly manner, it will also help
to find weight in Claim of Functional Head if he had performed in past with
similar acquisition of asset and its use, it will also help keep track of
Finance Cost that also Forms part of COGS as Line Item Before Selling And
Distribution Cost. This also effects Linkage between Charge of Fixed Asset
Investment on Overall Cost and Marginal Cost Per Unit of Output.
The Mistake
made by BOD is often Not Considering the Overall Effect on Cash flow due to
Availability or Non Availability of Assets as well as Alternative Financing
Arrangement, For Example If Particular asset is outside of Financial Capacity
of Firm but it can build good work load for same assets it can simply have
Joint Venture with another firm for Sharing the Asset, its Advantages and Also
make decision about Risk Sharing Arrangement, But do so Company requires
internal assessment of Cost Benefits and for same it needs Work Load
calculation and also inputs like Working Capital Constraints and Cost of
Capital and Inventory Turnover Ratio etc inputs, A Right Manufacturing
Accounting Process will Provide basic Data in more relevant manner for same if
designed in way the Firm has phases of Business operations Planned. ABC3M
again brings back BOD to Planning Board where they have to dive into PLC and
Industry Analysis to have opportunities validated and primary operations
drafted to revisit them at each periodic instance to validate and updates as
per dynamics of Business Environment and for same Accountants are required to
provide data on Cash Generated through Operations.
There are
other implications of same as well, Financial Profit considers Unearned Cash
through Debtors Position but ignores the fact that some of them may be
irrecoverable, It requires provision to be made with reasonable assumption but
again it is deductible in eyes of tax man becomes subjective matter, on other
hand Carry forward of Provisions and Unsettled accounts also creates problems
at it is reflected in Opening and Closing Balances as well giving falls
impression of healthy operations, Thus More relevant information is about their
recoverability and Costs related to their recovery as well as position in books
(Finance Cost related to delayed recovery) this is not accurately MAPPED in
Financial Accounts in straight forward reading as notes forming part of
accounts are vague on many aspects of transactions and often ignored, also the newer
disclosure requirements are not intuitive for reading.
The BOD then
have to rely on information that is not 100% Reliable and also needs further
details before decisions, Again the External Stake Holders Like bank and
Financiers require further details for overall analysis which is called CMA
Data and Concise Version of Cost Sheet linked with Financial Accounts i.e.
Manufacturing Accounts. And as per experience with SME they need to create same
every time they are opting for CC Renewal or Machine Financing, This Further
Establishes the requirement of more detailed Accounting Information
(Financials) in Cost Sheet Based Data which ABC3M proposes to be
recorded in real time to become control tool rather than Compliance.
The Extra
ordinary Items in AS 3 are related to Accidents, Unplanned Events and
unanticipated transactions are to be disclosed by Management at each Financial
Reporting Period (Quarterly and Annually) they represent the ability of Company
to Cope up with Environment thus needs to be first recorded in manner that
reflects true capacity of company, For Example if Flood interrupts production
12 days resulting very low inventory position at end of reporting period, it is
not fault of SCM in Inventory Management and Safety Stocks can not be increased
based on single incidence, but it needs to be Diversified at various location
to systematically reduce target cost and maintain adaptability in Supply Chain,
Its Financial Position Implication that not enough Value is Created in End of
Period is also not proper presentation of capacity of Company and definitely is
not valid argument that company is loosing sale. The separate disclosure of
same can present this fact but to substantiate that claim records also must
provide detailed information about turnaround time taken by Operations and
Working Capital Movement in same period and Creditors Movement in subsequent
period also needs details of Debtors Position and Cash Recovery Rate pertaining
to post flood period, The Financial Accounting Data Provides this information
but in Unstructured manner, This may helpful to external readers but for BOD
and Investors key information is Hidden in form of Ledgers and Journals which
becomes hampering work, That can be eased with simple tool of Cost Accounting
linked with CRM to explain real time operations position that translates into a
Decision Making Matrix by way of Inputs from MIS rather than from Assumptions
and Unstructured Information.
Accounting Standard 4 Contingencies and Events Accruing
after Balance sheet Date
The AS4 Deals with primarily transactions that
do not complete within Time Limits of Reporting Period under consideration but
before actual reporting of same, For Example A Debtors goes Bankrupt after 31st
March but reporting is to be done on 1st May then in Books It
appears as favourable position to company but in reality that Loss Needs to be
corrected in Books, This laps in record keeping is acceptable when Company has
no knowledge of it, but if company has knowledge but does not report same, then
it is a problem, another aspect of same is that if company does not tracks such
events then it is a larger problem for company because Transaction Covered
under AS 4 are as Follows:
·
Contingent Losses on account of Debtors
Insolvency
·
Contingent Losses on Account of Changes in Tax
Structure
·
Penalties
·
Warranty Expenses
·
Loss of Assets in Accidents and Unforeseen
Incidences
·
Liabilities arising due to uncontrollable events
·
Recovery of Past Losses
·
Errors in Judgement or Estimation of Effects of
Past Transactions
·
Escalation Clauses in Contracts – Favourable or
Unfavourable
·
Employee Benefits related Calculations and
Allocations
·
Change is Usefulness of Asset
As This List is not Exhaustive neither it can be said to be
completed and applicable to each Firm with same degree of relation, ABC3M
takes approach of Preventive planning in same and in partnership with each
Functional Head it prepares a list of possible occurrences and then requires
Directors to prepare a monitoring Matrix which helps Functional Heads to Prepare
a watch list in line with ABC Technique used in Inventory Management to ensure
that Key aspects are monitored regularly to Make Post Effect Decisions more
smoothly and Help Finance Department to keep adequate Cash Ready to manage Risk
of Interruption and also Arrive at SAFTY CAPITAL and Charge of its Cost
to overall operations, this also keep BOD informed about Week Points in System
to keep watch at. And for same ABC3M again asks BOD to Scan Business
Environment to carry out Risk Profiling on each aspect of Business and then
make Strategy Based on Constraints of Resources.
The undiscussed Item in this Analysis is the Joint Ventures
and Commercial Arrangements and their implications on main business also needs
to paid attention to, The Formal Arrangement may not exist between Upward and
Downward Supply Chain but often Businesses make investments in SCM in Vertical
and Lateral direction in guise of
Businesses Leniency and Commercial Relationship, But with time and Dynamics
these relationships are often not monitored as they are non-core activities for
Business and thus there direct link is not disclosed but are they are a Direct
Force Effecting the Operations, and the shocks of such change are not affected
in Financial Position, But as Decision Makers BOD must understand its complex
effects on Organization and thus needs to reported, But no such formal
Accounting convention exists apart from Disclosure Requirements, And to improve
upon same if Functional Heads Dealing with such parties make it part of their
reporting it makes easy to take care of same, Again this needs to paid
attention to as per Needs of Organization and Cost Accounting System
Accommodates such requirement by Way of 2 Tools Control Accounts and
Provisions, And streamlines Financial Accounting and Tax Accounting BY Way of
Reconciliation Entries in real time.
Accounting Standard 5 Net Profit and Loss for Period and
Prior Period Items and Changes in Accounting Policies
This AS deals with Transactions that are Regular,
Extraordinary and Not related to current period and Specifically Changes in
Accounting Methods, We need to pay attention to Disclosure requirements and
other aspects are already discussed while discussing AS 4, The Main aspect that
needs to observe here is Changes in Accounting Policies, The most of Accounting
Frauds are done with allowed Freedom for deviation or change from regular
methods of accounting and policies and also changes in presenting facts, E.g.
Diff rate for Charging Depreciation or Changing accounting from Cash Basis to
Accrual Basis or change in Accounting Period. For External Parties the relevant
information is catered through Financial Accounts but for MIS Purpose necessary
changes in Practice are crucial as the Method of Costing can not be same for
each Company and More Importantly Within Company Itself A Different Method of
Costing needs to be followed to Make right Decisions and that may not be in
line with regulators perspective or simply not required, But the Estimation and
Absorption Methods of Cost and Revenue Items Differs on Actual Basis, this
gives conflict with regulators inviting scruitiny, And to tackle same ABC3M
has to have Balancing Accounting Steps as Check Bits and Reconciliation Points
that has to be Periodically Matched with Overall Data and Hence Accounts have
to get in shoes of Financial Controller and then translate its process to
ensure overall compliances. When the Calendar is set for such Transaction
Recording and Verification it reduces need to Scruitiny by BOD and Allows BOD
to Pursue More Important tasks of company that drive main objectives of
company.
Accounting Standard 7 Construction Contracts
AS 7 Mainly Deals with:
COMBINING
AND SEGMENTING CONSTRUCTION CONTRACTS
CONTRACT
REVENUE
CONTRACT
COSTS
RECOGNITION
OF CONTRACT REVENUE AND EXPENSES
RECOGNITION
OF EXPECTED LOSSES
CHANGES IN
ESTIMATES
DISCLOSURE
REQUIRMENTS
As a Company
it may be a Contractor or Client depending upon Nature of Transaction
When Company
is Contractor it has pay attention to Revenue, Costs and Value Addition/ Loss
from Transaction and When Company is Recipient then it has to pay attention to
escalation clauses, Conformity with Contracted Benefits, Quality Delivery,
Timely Completion and Effects due to Non-Timely Work and Errors in Execution
and Unaccepted circumstances.
Again, when
Construction Contracts are drafted all such criterion are mate when both
parties experience in same and fully aware of aspects that can hinder actual
work and consequences of same there are very less instances of friction, But
when parties involved are ill prepared and liability clauses are drafted
without due consideration to variable factors then it makes difficult to
execute work and also keep costs in control.
As Basic
Principle of ABC3M is Identify Requirement First, Plan Within
bounds, Engage Domain Experts and then execute it simply reduces overall lag
and friction in work,
The
Accountants role in same becomes as Valuer of Work being done, Financial
Controller for Transaction Processing and Pre-Payment Authorization and Recording
of Transactions in Manner required by organization by rules of Cost Accounting.
It even makes Inter Firm Communication clear to oversea the execution more
smoothly with accuracy and in real time.
To Enable so
ABC3M suggest using Project Costing Method with Use of OH Accounting
on the basis suitable for Company, It can be Man Hours, Actual Accounting or
any other Cost Driver based on actual terms of Contract.
Illustration:
When A Ltd
Contracts with B Ltd to Build a Silo in Company Premise and to control cost
provides in house engineer for overseeing work, Then Cost Of Asset also needs
to include Cost of Engineers time spent on that job, But That Salary is Revenue
Item for Company which can get charged Double as expenses in Salary and Again
Accounted Twice as Cost of Asset, This has Tax Implication as well, As Revenue
Expenditure is tax Deductible expenses for Current period and If Charged to
Asset it is Depreciated over useful life of Asset.
Now for Tax
Purpose it is Beneficial to Charge Engineers cost to Revenue but for MIS
Purpose that expenses is essential for making replacement decision and cost
advantage analysis to compare with competitors again that decision it self can
be of no use as Cost Asset being Sunk Cost when Decision is made with Principle
of Marginal Cost. But BOD Need Data to reflect that fact. When Sum Involved is
insignificant then it can be simply ignored but consider a scenario when Such
Asset is built with External Financing and Company is able to save Direct Cash
Flow; at cost of Deviation of Regular Business Activities towards asset
construction then this all becomes signification, We also have to consider this
with aspect when company is Provider of Infrastructure goods/ services it has
to understand clients perspective to present commercial terms and take
advantage of situation by staying more informed and enhanced user profiling to
bag more and more orders. The ABC3M in this Scenario will help
company to identify trends in User Profile itself and when Value Proposition
Statement is Prepared it will allow the company to take position in way that it
will allow to have more impact to client than competitors. Again, Accountants
can serve as Input Providers in all such process to increase value of company.
The Next
Aspect under consideration is Costs associated with Construction Contracts and Sharing
of same on Contingency Clauses, A Good accountant will always monitor all cost
elements at time of recording of expenses and revenue itself and help
Functional Heads to make aware about performance of such job and also help them
identify Indirect Costs like Cost of Finance, S&D and Admin OH to make
decisions within framework of allowable scope of work, or allow Site in-charge
to make addition expenses who’s Value in terms of Tangible and Non Tangible
Benefits will be more. Allowing Company to make impact in Market in terms of
Brand, Distinctive Identity and Driver od Excellence.
Recognition
of Expected Losses: Often Businesses undertake some job for reasons like
fending off competition or Market Share Maintenance and Cross Selling
Opportunities, In Such cases it needs to be reflected in not just MIS but in
Financial Accounts as well as this is utmost important factor for External
Stakeholders to judge the true capacity and market position of company, ABC3M
requires Accountants to Treat All Such Instances as Separate Line Item and a
Disclosure of same is to be made in line with AS3 AS4 and AS7. Often Such losses can be recouped with
further extension of contract or increased scope of work and this needs to
reported on individual and aggregate level to ensure true position is disclosed
and BOD can understand Opportunities Available and Long Term Impact of Such
Transaction enabling them to steer company in more efficiently.
Accounting Standard 9 Revenue Recognition
This AS deals with methods for Revenue Recording
based of Direct Operating Activities and Revenue Earned through Letting others
use resources of Company. Aspects Dealt in same are:
·
Revenue earned through Sale of Goods/ Services
·
Activities Covered over more than 1 Period of
Time
·
Uncertainties Pertaining to Unearned Revenue and
Contingent Losses
·
Royalties and Other Incomes based on Tangible
and Non-Tangible assets of Company
·
Treatment of Interest and Dividend Incomes
·
Deduction of Taxes from Revenue
·
Sale
achieved through Installments and Linked Services and Matching Principle
relating to Revenue Recognition
ABC3M adds value in same only by adding more check points of Procedural Aspects, The AS is self-explanatory about Principles of Revenue Recognition but often it is observed that lack of training in Accountant increases risk in this aspect when they fail to establish the fact that EEESNTIAL LIABILITIES AND OWNERSHIP RELATING TO GOODS/ SERVICES UNDER CONSIDERATION can be established by way