Once the Group Chart of Accounts is defined and perfected, you've taken the first step towards Automated Financial Reporting and Consolidation within the Group. However, this is just the beginning.
For detailed guidelines on creating an effective Group COA, refer to our previous article: 'Designing a Powerful Group Chart of Accounts (Group COA) for Automated Consolidation').
The next challenges involve ensuring that all of your legal entities not only understand and accept this new Group COA, but are also ready to align their accounting practices with the Group's requirements and successfully implement the Group COA.
Table of Contents:
1. Preparatory Steps Before Choosing a Group COA Implementation Strategy
Before settling on an implementation strategy for the new Group COA, there are preliminary steps to take into account:
1.1. Accessibility of the New Group COA: First, the new Group COA should be accessible to all legal entities and stakeholders involved. One optimal approach is to upload the Group COA into the reporting system. This ensures that stakeholders can effortlessly access it in line with their designated access rights.
Examples 1-2
1.2. Detailed Descriptions of Group COA: It's crucial that each account within the Group COA is accompanied by thorough descriptions detailing the specific types of transactions to be booked, as well as any booking requirements (e.g., the use of dimensions). More accurate descriptions lead to better-quality bookings and a deeper understanding of the actual data. Providing such detailed descriptions also aids legal entities in comparing the new Group COA to their existing Local accounts.
Example 3
1.3. Training on the new Group COA: Comprehensive training sessions should be organized to ensure a unified understanding of the new Group COA among all legal entities before deciding on the implementation strategy.
1.4. Review of the new Group COA: All legal entities should thoroughly review the Group COA, to ensure that it aligns with their industry-specific aspects and regulatory requirements, contains specific details for Local key performance indicators (KPIs), while also being user-friendly.
1.5. Mapping of Local COA to Group COA: Instruct all legal entities to establish a mapping between their Local COA and the Group COA. This should consider not just the account names but also the detailed descriptions and requirements set forth by the Group COA. Mapping serves as an evaluation tool, indicating how closely each local COA aligns with the Group COA.
1.6. Assessment of Each Legal Entity: Undertake a thorough assessment of each legal entity within the group. This should cover current financial practices, local regulatory, tax, and accounting requirements, as well as readiness for Group COA implementation. Also evaluate the specifics of each entity's accounting/ERP system, the availability of IT resources for implementing the new COA, and projected costs and timing. These comprehensive assessments will determine whether a particular legal entity can adopt the Group COA for statutory reporting or if an alternative implementation strategy is needed.
1.7. Understanding Mindset of Accountants: There are always exceptionally good accountants who understand the importance of their work for a company and are open to new challenges for company growth. If you are an accountant and you are reading this article - most likely you are this good exception 😊. However, very often, one of the more subtle but significant challenges in implementing the Group COA, or any new Group or management requirements, is overcoming resistance from accountants who may view their role as narrowly confined to statutory compliance and tax reporting. It is essential to assess whether the accountants understand that their work, while essential for compliance, is also fundamental for informed decision-making and effective management, that accounting data relevance extends beyond tax and regulatory reporting; it's primarily about enabling strategic business decisions, stakeholder communication, and meeting management requirements. It is crucial for accountants to realize that they serve the company, its development, and well-being, and one of the main stakeholders of their work is the management. If the company were to fail, statutory reporting would become pointless.
If you have accountants in group companies with the challenging mindset described below, changing their mindset and getting their buy-in and readiness to implement Group COA is actually one of the hardest preparatory steps.
Challenge with the accountants' mindset: Frequently, there is a challenge is transforming how accountants perceive their roles. All too often, accountants see their duty as limited to statutory compliance and tax reporting, and believe that the only stakeholders of their work are statutory establishments, not the company. When efforts are made by company management to elevate management reporting quality, they encounter resistance from accountants. Whether it's: 1) implementing a dimensional structure - to provide relevant information about the costs and profitability of company's profit and cost centres, or 2) requirement of booking intra-group transactions in separate accounts - to provide relevant and easy-to-read information to management and other report users about the value of transactions and balances with Group companies, as well as to facilitate automation of the consolidation process, or 3) requirement of adding more detailed accounts to Local COA - for management to better understand the data and the data to match the Group accounting requirements.
Accountants often argue that: 'These new requirements are not required by the accounting laws. These new requirements are against the accounting laws (not mentioning any). We know how to do the accounting correctly, and no one should disturb our work with different requirements, otherwise it will not be possible to make correct tax and statutory reporting. If you want additional data, use other systems!'. And guess what - often the management is scared by these arguments and abandon any further implementation.
When faced with resistance from accountants, it is crucial to navigate this resistance and gain accountant buy-in for the successful implementation of the Group COA: - address the perception that their work only serves statutory establishments, not the broader company objectives, - highlight the importance of elevating management reporting quality to improve business decisions and strategic planning, - counter resistance to new practices, like implementing a dimensional structure or segregating intra-group transactions, with discussions on how these practices enhance the readability and strategic value of financial data, and - ensure accountants understand that detailed accounting aligned with Group requirements not only aids in compliance but also in strategic management and stakeholder communication.
Be prepared to address concerns by clarifying that: 1) the use of dimensions in accounting is not prohibited by any accounting or tax laws, 2) intra-group transactions can be managed within the accounting system by creating separate accounts for transactions with legally related and non-related group entities, which can later be mapped to the requisite Group account as needed - see Example 4 (in situations if the Group wants intra-group transactions to be booked in separate accounts, but not all group companies from management perspective are actually related by legal structure), and 3) greater detail in accounting data can be achieved by introducing new accounts or sub-accounts, enhancing the quality of financial data for strategic analysis and reporting.
2. Strategies for Successful Implementation of a New Group Chart of Accounts (Group COA)
Typically, organizations have two primary strategies for implementing a new Group COA across their various subsidiaries or divisions:
Full Implementation: Separate legal entities take on the Group COA as their primary Local COA, replacing their previous Local COA.
Adjustment of Local COA & Continuous Mapping: The individual entities modify their existing Local COAs to align them with the Group COA and maintain a mapping between the two.
Both strategies come with their distinct set of advantages and potential challenges. Let's explore them!
3. Strategy 1: Full implementation
A full implementation strategy ensures that a legal entity fully replaces its Local COA with the Group COA and follows the detailed Group instructions on account numbering, naming, and booking requirements. Typically, the Group COA will contain various account types, such as 'Local' accounts for statutory reporting, 'IFRS Adjustment' accounts for IFRS compliance, and 'Consolidation' accounts for consolidated reporting. In most cases, an individual legal entity will implement only the 'Local' type of accounts in their accounting systems (Legal Entity 2 in Example 5 below).
3.1. Data Migration Approaches (Strategy 1 - Full implementation)
Full implementation of the Group COA involves migrating data from the old Local COA to the new Group COA within the accounting / ERP systems. Generally, there are two primary methods for this data migration:
3.1.1. 'Fresh Start' Approach: Close the year or period using the old Local COA. Then, create a new database in the accounting / ERP system using the new Group COA. Import opening balance sheet figures into this new database in the format dictated by the Group COA and with all necessary details (e.g., partner names, invoice numbers, dimensions, etc.). Resume accounting activities using the new Group COA. It's advisable to run parallel accounting in both the old and new systems for a period of time to ensure consistent outcomes - account balances, partner balances, and taxation reports. This method keeps current period data in the new database and historical data in the old database. This is a common approach, but I personally prefer the second option.
3.1.2. 'Data Replacement' Approach: Develop detailed mapping and step-by-step instructions for accounting / ERP system IT specialists. This will guide them in replacing old Local account numbers and names with new Group account numbers and names in the existing accounting / ERP system transactions in a current version of the system. This method ensures the availability of historical data in a consistent format within the same system but requires scrupulous planning.
Replacement tasks should be performed in at least two steps to avoid conflicts between old and new account numbers. First, identify those Group account numbers that currently are NOT used in the Local accounts and perform replacement to these accounts. In Example 6 below, the first step would be to replace Local account #76641 with Group account #76642 in all transactions. Afterward, it is possible to proceed with other replacement tasks. In the example below, only after Local account #76641 is replaced with Group account #76642 in all transactions, and account number #76641 becomes empty, it is possible to perform Step 2 and replace Local account #76640 in transactions with the needed Group account number #76641.
For safety, create a backup of the database, perform the migration tasks there, and run parallel accounting in both databases for a short period to verify the reliability of the new setup and the consistency of the outcomes.
Whichever data migration option you choose, it will be necessary to involve accounting / ERP system developers. They will need to perform the data migration, as well as to ensure that all regulatory and taxation calculations and reports configured in the accounting / ERP system continue to function correctly post-implementation.
It is worth considering a few more points regarding data migration:
Data Validation: Post-migration, it's crucial to validate the migrated data to ensure that all transactions and account balances are accurate and complete.
Audit Trails: Ensure that the migration process is auditable, meaning there should be a clear record of what changes were made, by whom, and when.
Backup: Always maintain a secure and easily retrievable backup of the original data before commencing migration activities.
Rollback Plan: Develop a rollback plan that can be initiated if the migration encounters critical errors that cannot be easily resolved.
Timeline: Setting a realistic timeline for the migration can help manage expectations and allocate resources more efficiently.
Stakeholder Communication: Keep stakeholders updated throughout the process, especially if you encounter issues that could lead to delays.
Motivation: Accounting teams usually have the most work in data migration, especially if accounting has to be performed in two databases for data validation. Communicate with your accounting teams, motivate them, and offer appropriate compensation for their additional efforts.
3.2. Advantages - Strategy 1 (Full implementation of Group COA):
Standardization: A unified Group COA facilitates consistency across all the legal entities.
Communication: Uniform account numbers make it easier to communicate with other legal entities, for example, regarding reconciliation, leading to quicker month-end and year-end closes.
Ease of Audit: Internal and external audits become more manageable as auditors only have to familiarize themselves with one COA structure.
No Mapping: One obvious benefit is eliminating the need to maintain a mapping to the Group COA.
Various resources highlight additional benefits for full implementation of the Group chart of accounts such as: more efficient and unified format reporting, easier consolidation, improved data quality, better comparison and performance analysis, and easier mergers within the Group. However, these advantages may be irrelevant if the Group already has an efficient reporting and consolidation system in place. If the Group has implemented the reporting and consolidation system - it makes little difference whether the imported accounting data contains Group accounts or Local accounts, as long as the mapping is efficiently maintained in the reporting system.
3.3. Challenges - Strategy 1 (Full implementation of Group COA):
Time and Cost: Implementing a unified Group COA can be a time-consuming and potentially costly exercise, as it requires not only additional internal resources, but also accounting / ERP system development.
Change Resistance: Employees accustomed to their local COAs might resist the change, which could slow down the implementation process.
Training Costs: Accounting teams will need training to understand and work with the new COA effectively.
Operational Interruptions: The process of switching over to a new COA can disrupt regular accounting and reporting activities temporarily.
Data Migration Risks: Historical data will need to be accurately mapped and rebooked to the new COA, which can be a complex and risky process.
Level of Details: If local statutory or tax reporting requires additional accounts, these would also need to be added to the Group COA. This can make the Group COA overly detailed and country-specific
Legal and Regulatory Challenges: In certain countries, statutory requirements rigorously dictate the COA, specifying both account numbers and names. Under such constraints, adapting the account numbers and the account names from the Group COA becomes unrealistic.
Acquisitions: In case of acquisition of a new company, full implementation of Group COA would take much more time and costs and postpone the reporting of actual data.
Outsourced Accounting Services: If any of the Group's legal entities rely on outsourced accounting services, achieving full implementation of the Group COA can be particularly complex. Outsourced services may use their own unified COA to ensure some standardization in their processes and effective regulatory and tax reporting. It might be easier to negotiate adding more accounts to meet the Group's detailed requirements and ensure mapping (strategy 2) than to replace their COA.
4. Strategy 2: Adjustment of Local COA & Continuous Mapping
Adjustment & Mapping strategy involves updating the Local Chart of Accounts (COA) to align closely with the Group COA. New accounts are added, and detailed descriptions and booking requirements are refined until the Local COA fulfills both Local statutory requirements and Group instructions. Afterwards, a mapping between the Local COA and the Group COA is maintained. Under this strategy, the legal entity retains control over account numbers and names, as well as over amount of the accounts - the amount of accounts in Local COA can be higher than in Group COA.
4.1. Adjusting the Local COA (Strategy 2)
4.1.1. Comparison of Local COA vs Group COA
The adjustment process commences with a thorough review of the Group COA. Legal entities should identify accounts that are relevant to their operations and study the detailed account descriptions. This information is then compared with the existing Local COA to identify areas for alignment.
Greater Detail in Local COA than in Group COA: If the Local COA already aligns well with the Group COA or provides even more detailed information, it is possible to proceed with direct mapping in the reporting system without any need for adjusting the Local COA 😊. It's generally acceptable for the Local COA to contain more granular details than the Group COA. In such cases, multiple Local accounts can be mapped to a single Group account to ensure consistent reporting and consolidation.
Example 7
Less details in Local COA than Group COA: If the Local COA does not provide as much detail as the Group COA, additional accounts must be added to the Local COA to meet the Group's requirements. In other words, the adjustment of Local COA is needed.
4.1.2. Local COA Adjustment Steps:
Let's say a separate legal entity needs to adjust its Local COA to match the Group's requirements for Utilities expense reporting. Here are the steps to follow:
a - Study Group Account Descriptions: Refer to the detailed descriptions of accounts in the Group COA for context (see Example 8).
Example 8
b - Compare COAs: Compare the Utilities expense accounts in the Local COA to those in the Group COA (see Example 9 below). If the Local COA doesn't contain sufficient details to meet the Group’s requirements, proceed to the next step.
c - Identify Relevant Accounts: Identify which accounts in the Group COA are relevant to the legal entity. This helps define the types of income or expenses that need separate accounts to meet Group requirements. In Example 10, the accounts to focus on are marked with 'yes'.
d - Add New Accounts: Add the necessary new accounts to the Local COA. Generally, it's acceptable for the Local COA to be more detailed than the Group COA. For instance, while the Group COA might combine 'Water Supply' and 'Sewerage' into one account, the local entity could separate them (see Example 10).
e - Reallocate Existing Accounts: If an existing account is now being subdivided, determine which type of income or expense was most significant within that account and allocate it accordingly.
In Example 10, 70% of expenses in the Local COA's 'Utilities' account were for electricity, therefore this account is renamed to 'Electricity' to reflect its new, narrower focus and at the same time to ensure data comparison with prior periods.
f - Adjust Statutory & Tax Reporting: Update the statutory and tax reporting within the accounting/ERP system to reflect these new accounts. Since this doesn’t involve data migration, accountants can often manage both - adding new accounts and adjusting the related reports in the accounting / ERP system.
g - Begin Accounting: From the start of the new accounting period, begin using the newly added Local accounts for all relevant transactions. Group management usually opts for a more forward-looking approach in implementing the Group COA. They often set a specific date—such as the beginning of the next fiscal year—by which all separate legal entities must have implemented and be adhering to the detailed requirements of the Group.
h - Create and Import Mapping: Once the Local COA has been adjusted, create a mapping to the Group COA and import this mapping into the reporting system.
4.2. Understanding Continuous Mapping (Strategy 2)
This implementation strategy, 'Adjustment of Local COA & Continuous Mapping,', necessitates ongoing account mapping. Keeping a mapping between the updated Local Charts of Accounts (COAs) and the Group COA within the reporting system, not somewhere in spreadsheets, is advantageous for both data clarity and management oversight.
Example 12
When mapping is implemented within the reporting system, you can automate data imports from Local accounting/ERP systems to the reporting system.
4.2.1. Features in advanced reporting systems to facilitate the continuous mapping:
- Data validation: Advanced reporting systems ensure robust data validation, guaranteeing that all imported data from Local accounting/ERP systems are accurately mapped to the Group COA. Should any issues with mapping arise, the reporting system will issue alerts, including but not limited to:
Newly identified accounts (and dimensions) in the imported Local data that need to be added to the mapping.
Restrictions on deleting mapping entries for accounts already used in reporting; the system only permits remapping.
Examples 13-15
For more insights on data validation and import checks, refer to the blog post: "Data Validation and Import Checks."
- Easy maintenance of mapping: When new Local accounts are identified during data imports, they are automatically added to the entity-specific mapping. Typically, only a simple click is required to assign the corresponding Group COA account, streamlining the mapping process and enhancing data consistency.
Example 16-17
- Real-time Mapping Adjustments: Advanced reporting systems can adjust "on the fly." This means that if any mapping alterations occur, all data and reports within the system are instantly updated, eliminating the need for data re-imports.
- History of Mapping: Some reporting systems maintain a data log that captures the history of all mapping adjustments. This feature is invaluable for tracing changes in the data, facilitating internal audits, and providing a comprehensive trail for compliance purposes.
Example 18
- Visibility of the Local accounts in Reporting: Reporting systems may permit viewing of both Local and Group accounts in the reporting interface. This feature enhances clarity for Local entities and for Group financial controllers, helping them to understand the data in greater depth.
Examples 19-20
4.3. Advantages - Strategy 2 (Adjustment of Local COA & Continuous Mapping):
Flexibility: This strategy allows for a degree of customization at the Local level while maintaining a consistent accounting structure at the Group level.
Local Compliance: It allows each legal entity to adapt its Chart of Accounts (COA) to comply with local statutory and tax regulations.
Cost-Effective: Typically less expensive and less time consuming than a full COA overhaul, as it doesn't require complete data migration or retraining for an entirely new COA structure.
Real-Time Adaptability: Adjustments can be made on an ongoing basis without disrupting the entire accounting system, thanks to real-time mapping features in advanced reporting systems.
Audit Trail: Maintaining a history of mapping changes enables better audit trails and compliance checks.
Incremental Implementation: This strategy can be implemented in stages, reducing the risk of operational interruptions.
Ease of Training: Since the changes are incremental and somewhat familiar, training expenses and resistance are often less compared to adopting an entirely new COA.
4.4. Challenges - Strategy 2 (Adjustment of Local COA & Continuous Mapping):
Complexity: Over time, the mapping between the local and group COA can become complex, especially if the organization is large and has many legal entities.
Risk of Errors: If not managed properly, the mapping process can introduce errors, particularly if manual intervention is frequently required.
Maintenance: The system requires ongoing maintenance to update mappings, especially when local regulations change or the business evolves.
Dependency on Reporting System: The strategy's success often relies heavily on the capabilities of the reporting system in use. Inadequate systems can lead to inefficiencies and errors.
User Resistance: Although less disruptive than a full COA change, employees still have to adapt to new account numbers and descriptions, which may meet some resistance.
Operational Overhead: While it may not require full data migration, the mapping process and any local adjustments are not without their operational costs in terms of time and labor.
5. 'Mix' Strategies
When it comes to the actual implementation of a Group COA, approaches can vary widely often incorporating elements from both strategies described. For instance, a legal entity may indicate to the Group that they are fully adopting the Group COA, when in reality, they are utilizing internal mapping within their accounting / ERP system. This allows them to continue their accounting practices using Local accounts, while submitting financial data to the Group using the Group's COA. Though this approach is generally acceptable, it does necessitate the development of the accounting / ERP system. Furthermore, it limits the Group's oversight, as they do not have direct control over the mapping process and cannot view in the imported data how Local accounts are actually being used.
6. Managing Historical and Actual Data up to Implementation
While the strategies discussed above focus on future implementations, a critical issue remains: how should one handle both historical data and actual data up to the point of implementing the Group COA, given that they may not comply with Group COA requirements?
If Historical Data are Not Needed:
Do Nothing! Often, Group management adopts a forward-looking perspective and sets a specific start date for implementing Group requirements across all legal entities. As of this date, entities begin reporting actual data to the Group, leaving historical data unadjusted.
If Historical Data are Needed:
If historical data or actual data up to the point of Group COA implementation are essential for reporting—such as for comparative analysis in consolidated financial statements—adjustments will be needed. There are several options for refining the historical data.
6.1. Approaches for Adjusting Historical Data
6.1.1. Manual Rebooking in Accounting/ERP System: This option entails manually adjusting selected accounts crucial for reporting. For instance, in the Local accounting / ERP system, all income might be booked under a single account. However, according to the Group COA, each revenue type should have its own separate account. To comply, transactions in the local system would need to be opened and rebooked into the newly created, separate accounts that align with the Group COA. While effective, this method is risky, as there is a high possibility of manual errors. In addition, many accounting/ERP systems disallow modifications to closed periods.
6.1.2. Automated Rebooking in Accounting/ERP System: This approach engages system developers and relies on specific criteria—such as account number, partner name, document number series, source of booking, or text in the comment field—to automate the rebooking process. For instance, penalties marked with document numbers starting with "P99" can be automatically rebooked to a new penalty income account. This is a safer option, as the process is automated and can be reversed if necessary. However, it still involves data migration, as well as development time and costs.
6.1.3. Advanced Mapping in Reporting Systems: The most straightforward option is to utilize advanced mapping features in the reporting system, if available. Advanced mapping offers a variety of ways to improve both historical and newly imported actual data until the implementation of Group COA. Specifically, it:
Adds or adjusts necessary dimensions in the transactions
Adds partner names if there is none in transactions
Moves intra-group transactions into separate Group accounts for consolidation and reconciliation
Transfers IFRS adjustments into distinct accounts
Splits transactions from a single Local account to multiple Group accounts based on set criteria like partner names, comments, document numbers, and dimensions.
Examples 21-25
Examples of Advanced Mapping Rules in the Reporting System: 1) To adjust dimensions
Regular Account mapping: If the Local account is '8800 Corporate Income Tax', map it to the Group account '79500 Corporate Income Tax' (Example 22).
Regular Cost center mapping: If the Local dimension in any account is 'OTHER', map it to the Group dimension 'OTOTH' (Example 23).
Advanced mapping adds to the previous definitions: If the Local account number is '8800' AND the Local Cost centre is 'OTHER', then map to the Group dimension 'OTCIT' instead (Example 21). Similar for account '8810'. 2) To move intra-group transactions into separate Group accounts and adjust the dimension
Account mapping: If the Local account is '5310 Trade Creditors', map to the Group account '55100 Trade creditors' (Example 25).
Advanced mapping adds: If the Local account number is '5310' AND Partner name is 'Coast Group Ltd', then map to the Group account '55101 Trade Creditors - Group' instead (Example 21). Similar for account '7910', only the advanced mapping defines to apply the dimension 'ADOTH'. 3) To transfer IFRS adjustments into distinct Group accounts
Account mapping: If the Local account is '7100 Change in active portfolio provisions', map to the Group account '73800 Change in active portfolio provisions - CIT deductible' (Example 24).
Advanced mapping: If the Local account number is '7100' AND the Comment field contains text 'IFRS', then map to the Group account '97360 Change in provisions - IFRS adjustment' instead (Example 21). 4) To split transactions from a single Local account to multiple Group accounts based on the Text in the comments field
Account mapping: If the Local account is '7220 Loan interest expense - Investor Platform', map to the Group account '73340 Loan interest expense - Investors' (Example 24).
Advanced mapping: If Local account number is '7220' AND Comment field contains text 'WHT', then map to the Group account '73343 WHT on Loan interest - Investors' instead (Example 21). 5) To split transactions from a single Local account to multiple Group accounts based on the Partner name
Account mapping: If the Local account is '7620 Internet and Hosting expenses', map to the Group account '76400 Internet and Hosting expenses' (Example 25).
Advanced mapping: If the Local account number is '7620' AND the Partner name is 'HR Systems', then map to the Group account '76401 IT Licences subscription' instead (Example 21).
In the first two approaches for aligning historical data with Group COA requirements, the responsibility falls on the separate legal entities and involves modifications to the accounting data. In contrast, the third, the advanced mapping approach, can be executed by group controllers, freeing up the legal entities to focus on the rapid implementation of Group COA requirements without impacting their existing accounting data. This last approach offers the advantage of minimal disruption to the accounting records while still ensuring compliance with Group COA standards. However, advanced mapping should be considered only a short-term solution for data improvement. This approach necessitates a detailed rule-set and could become burdensome to maintain. Therefore, a swift implementation of the Group COA is encouraged to reduce reliance on such a temporary solution.
Conclusion
In conclusion, it's clear that there's no one-size-fits-all approach to implementing the Group COA. Regardless of the strategy chosen, if executed correctly, any approach will facilitate automated financial reporting and consolidation. Over time, my viewpoint has evolved from advocating a 'strict full implementation for everyone' to recognizing the value of tailored solutions that best fit specific circumstances and deliver faster results.
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