GROWTH AND PROFITABILITYOptimizing the Finance Function for Small and Emerging Businesses phần 9

with GAAP. Waiting for an important event in the company life cycle to find out

that GAAP has been employed inappropriately may be expensive and lead to a be￾smirched management reputation and/or the expense related to a due diligence

process that does not yield financing. If the purpose for being examined is stymied

because of financial statement adjustments, the whole company suffers and the

business life cycle could be drastically altered.

Developing Accounting Methodologies

Translating the business to financials will require management/owners to deter￾mine the level of aggressiveness of certain accounting positions. Purists in the ac￾counting world maintain that the company’s performance is what it is and there is

no room for editorializing results. Practically speaking, the objective of external

reporting is to make the company look good on paper without materially misrep￾resenting results. The objective for internal reporting purposes is to translate the

company’s performance and financial state accurately. There are two potential pit￾falls to avoid:

1. Making the company look good in the near term at the expense of the

future

2. Sacrificing presentation on one financial statement to enhance that of

another

To navigate these issues properly, the finance strategist must employ a company￾wide approach to preparing financial statements and setting accounting policy.

To avoid making the company look good in the near term at the expense of the

future, the finance strategist must understand revenue streams and disbursements.

If accelerating revenue from a certain transaction serves a reporting purpose now,

what are the effects on reporting in the future? An example of this dilemma is rec￾ognizing the steady revenue from operating leases over an extended period versus

accelerating the lease payments and employing sales-type lease accounting. Al￾though many other factors affect the use of sales-type lease accounting, in this cir￾cumstance the steady revenue stream would be eliminated in return for a lump-sum

revenue number today. This may be good if the company is positioning itself for

an acquisition, but it may backfire if the company is public and feeling pressure to

make periodic earnings estimates indefinitely. Essentially the company would be

mortgaging future revenue for a quick hit now.

Avoiding a sacrifice on the presentation of one financial statement to enhance

that of another also requires an understanding of revenue streams and disburse￾ments. A good example involves the deferral of expenses. If the company is trying

to maximize earnings, it is tempting to capitalize expenses (i.e., put them on the

balance sheet rather than on the P&L). Doing so also may distort the long-term

202 FINANCIAL REPORTING

view of financial statements. This approach will have an impact on other financial

statements, unlike employing sales-type lease accounting, however. Inconsisten￾cies may result when analyzing the P&L in relation to the statement of cash flows.

A telling statistic is comparing cash flow from operations to earnings over time. A

rate of growth in cash flow over time that lags behind the rate of earnings growth

is a red flag to financial data customers. Although certain company initiatives are

expected to have this effect (a planned investment in infrastructure over time, for

example), systematically window-dressing earnings by moving P&L items to the

balance sheet eventually will create a situation that is difficult to explain to stake￾holders. Companies that overcapitalize expenses fall into this analytical quagmire,

as do companies that take advantage of nonrecurring write-offs. Companies that

regularly announce restructuring or special below-the-line charges are a prime ex￾ample of offenders in this area.

Both cases illustrate that financial statements as a whole must be taken into ac￾count when considering accounting policy. The finance strategist will be com￾pelled to maximize company results on paper and position the company for the

future or at the least avoid putting the company in a disadvantaged situation. Re￾gardless of reporting needs, the finance strategist must ensure that the finance

function translates the company accurately to financials to give data customers the

opportunity to make well-informed decisions.

A unique circumstance that is worth discussing as it relates to applying proper

accounting methodologies to the business is the issue of addressing foreign GAAP.

Multinational companies face a unique challenge in dealing with both statutory re￾porting requirements of a particular country in which they do business and U.S.

GAAP requirements. Public or private, if the company is doing business in other

countries, it will have to submit to local reporting rules. Local GAAP in a particu￾lar country may be made up of International Accounting Standards (IAS), its own

particular accounting rules, or a combination of the two. These rules vary from

country to country, and ignorance of the rules is no excuse for not complying. How

well has the finance function mastered the foreign rules that govern operations?

How well is the company converting foreign GAAP financials to U.S. GAAP?

How will the different levels of the organization address the knowledge level

of local and U.S. GAAP? It is not uncommon for a multinational company to hire

local professionals to manage a local subsidiary. When cultural and language con￾siderations are factored in, this is often the best way to position the local subsidiary

for success. Although local professionals may be familiar with local GAAP, how

familiar are they with U.S. GAAP? This becomes an issue only when the world

headquarters consolidates the worldwide data. U.S. personnel more often than not

assume that the data they receive is in U.S. GAAP form, while local professionals

submitting the data assume the U.S. team will convert it where necessary. Unless

told otherwise, the headquarters team has no reason to believe any differences

EMPLOYING ACCOUNTING METHODOLOGIES 203