Cross-border mergers and acquisitions (M&A) activity has picked up significantly in the aftermath of the Covid pandemic, as the world's organisations realise that doing business remotely is not just possible, but can even be preferable in some circumstances. Ambitious companies now have their sights firmly set on new opportunities to develop and grow their business internationally.
In the third quarter of 2021, for example, M&A activity continued its unprecedented run with total global announced transaction value increasing 13.7% sequentially and 32% year-on-year to US$1.17 trillion. Commentators are bullish about further growth in 2022.
International growth comes with a host of additional considerations and requirements. One of the most important is the creation of an effective group accounting manual.
The existence of a robust, practical and actionable group accounting manual is considered crucial not only for conducting an efficient due diligence process but also for the M&A integration process. For organisations participating in an M&A deal, accounting policies should be aligned and consistent in areas such as:
- Acquisition accounting and consolidation processes;
- Internal accounting and finance function-related policies/ procedures;
- Other important financial reporting topics, like the treatment of property, plants and equipment, financial instruments and accounting principles applied for revenue recognition, and/or lease accounting.
What's a group accounting manual - and what should it contain?
A group accounting manual is an in-depth document that outlines the accounting rules and procedures of organisations at group level, providing firm guidelines for group entities. It should be developed internally by the organisation, or by an on-site service provider. Group accounting manuals will vary in size, depending on the type of organisation and its geographical footprint.
It's the key to unlocking good financial reporting and corporate management. It's essential to ensuring that a company's earnings and financial and cash flow positions are presented accurately and reliably in complex circumstances, in accordance with the underlying accounting frameworks.
For example, accounting standards, such as IFRS, Swiss GAAP, UK GAAP and US GAAP, allow a number of options when it comes to the accounting treatment of transactions. There needs to be clear instructions at the group level as to which standards and accounting policies group entities should use to make sure there is a smooth and consistent approach for group reporting purposes.
And it's something that a company should consider, and focus on, from the outset. It should be nailed down before a company makes acquisitions, grows into new markets or carries out complex transactions. The accounting must be consistent and harmonised when a company expands - making changes is much harder down the line.
A group accounting manual should start with an introductory section that explains the purpose of the document and the management team's responsibility regarding the accounts of the firm. It should then cover an overview of the organisation and its entities, and make it clear how they factor into the accounting processes.
Then it should explain the accounting procedures and policies in good detail and lay out how reporting should be conducted. It must include all the different accounting aspects, such as internal controls, accounting definitions, policies and management reporting processes.
A good manual, however, should also go well beyond a set of accounting policies and principles. It should act as a guide on regulatory compliance, and the relevant statutory and management reporting requirements, as well as serving as a reference tool to cross-train existing employees and educate new hires. It should be embedded at the heart of the business - and accessible but not editable.
What are the benefits?
There are many benefits to having a comprehensive, actionable and tailored group accounting manual in place.
It provides a company, no matter its size, with a consistent approach to accounting as it grows. It's the basis for implementing established and robust internal controls across the group, and the best route to ensuring regulatory compliance across all relevant jurisdictions.
To make sure it's fully integrated with a company's particular environment and circumstances (and ERP system), it should be illustrated with real-life use cases from the sector or jurisdiction.
To illustrate this point, consider R&D. Under IFRS, there's a requirement to capitalise R&D costs, and so this will need embedding into accounting policies. But with UK GAAP, the company can choose whether or not to capitalise costs. A decision needs to be taken, and then kept consistent across all group entities.
Another good example is lease accounting. Under IFRS 16, leases that qualify for the low-value lease exemption may continue to be treated as off balance sheet. But what is the company classing as 'low value'? Internal classification should be established at group level and then applied consistently across subsidiaries.
And what are the risks of not having one?
Without an appropriate group accounting manual in place, the group will suffer from inconsistent accounting principles and therefore a lower quality of reporting - and a management unable to properly review financial performance.
Having a weak manual is just as problematic as having nothing whatsoever. We've seen numerous examples of out-of-date, or difficult to read manuals holding companies back. Some manuals also suffer from not being very practice oriented with regards to the individual company.
Being unprepared will typically result in more complex consolidation processes, with increased time and costs involved, and can also have a negative effect on auditing. Without a coherent and clear picture of the financials, it will take auditors longer to sift through the financials, pushing up their fees.
It can also have a significant business impact. If a company wishes to list, for example, a strong group accounting manual is one of the main areas of an IPO readiness assessment. Not having one can mean that an IPO is delayed, or even cancelled.
Talk to TMF Group
Keeping in control of your accounting obligations at home and abroad can be a stretch for any international business.
TMF Group's unrivalled mix of expertise and technology, delivered through a global network of professionals, can provide you with everything you need to build consistent, standardised global accounting processes, with rigorous local compliance at their core.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.