Treasury Accounting – Untapped Potential in Processes and IT

Treasury Accounting – Untapped Potential in Proce...

Source: KPMG Corporate Treasury News, Edition 39, January 2015   Treasury and Accounting – two departments, two worlds – connected via a process and often also a technical interface. For financial instruments, payments, cash pooling and in-house transactions, Treasury strictly serves as a supplier of data for accounting. But couldn't Treasury also fulfill other functions?

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Both departments are right next to each other in the process chain of companies, but rarely communicate with each other nevertheless. This is reflected in processes and systems whose integration is insufficiently optimized in many cases. Untapped earnings potential and benefits therefore often reside at the interface between professionals and IT systems.

The interface for financial instruments (cash pooling is disregarded here) between Treasury and Accounting is designed to automatically transfer the valuations and entries generated in the treasury management system (TMS) to the ERP system, in order to be able to process them further in ERP with as little adjustment as possible. On the other hand, accounting information is needed by Treasury, for example to analyze and control transaction and translation risks, plan liquidity requirements or manage commodity risks.

While automated interfaces between the TMS and ERP are the norm in many companies, many Treasury employees quite often are still busy with valuations outside the system or entering data manually into Excel tools at the beginning of each month. Frequently, the related documentation must then be coordinated still with Accounting in several sessions within the internal control system. This, in turn, requires considerable additional effort from Accounting in dealing with subsequent processes. In many instances, manual adjustments and reconciliations are necessary between ERP, the TMS and Excel tools. In most cases, this is caused by:

  1. hedge accounting issues 
  2. valuation of complex financial instruments
  3. parallel accounting in accordance with different standards (e.g. German GAAP and IFRS)

These inefficiencies in the process tie up precious human resources in both departments and, not least, bear other risks for error, such as flawed valuations or entries.

The above examples also have a direct impact on external reporting, e.g. IFRS 7 disclosures (fair value disclosures or sensitivity analyses). Here also, manual processes and auxiliary calculations in preparatory processes, lead to considerable additional effort for Accounting and Treasury – at least on a quarterly basis in addition to regular closing activities.

It is clear that untapped potential resides at this professional/technical interface. To realize it, the first step is to perform an analysis, which will then be used as a basis to identify, assess and plan the individual possibilities for improvement.

The issues that require improvement can be identified quickly because they frequently emerge from the same areas (see points 1-3). Their causes, on the other hand, are highly individual, and so also the realization of inherent potential. It is useful therefore to look at the possibilities offered by the existing treasury management system. To do so, it is necessary to take a step back in many cases, and to reassess decisions taken in the past:

  • Is portfolio management centralized for all relevant financial instruments in the TMS for all entities and can they also be assessed and entered there? If this is not the case, then it will be necessary to perform calculations outside the system (usually in MS Excel), to generate sets of entries from these, to transfer them to ERP and to document the entire process completely (often manually).
  • What functionalities does the TMS offer for hedge and parallel accounting? The following hedge accounting example illustrates the consequences: a change in fair value may be entered in aggregate (reversing entry on the first day of the following month) or as a delta (individual entry of differences) both under German GAAP (HGB) and IFRS. If the TMS is capable of carrying out delta entries, then automatic transfer of OCI to the income statement once the hedge reaches maturity is possible in the system. Cumulative entries, inevitably, lead to manual calculation and entry, which need to be performed outside the TMS.
  • How is parallel accounting performed in ERP? Different systems or versions of release handle parallel accounting differently, but depending on their flexibility, manual effort can be avoided or at least minimized by harmonizing presentation.
  • Can the TMS be used as a subledger, and is it also utilized as such, or only to generate and transfer account entries? Especially for reporting in the notes, the TMS provides more information than ERP. For example, by proper structuring of the accounts in the TMS, information can be presented and selected in much more detail than is possible and necessary in ERP.
  • At the introduction of the TMS, were the previous processes and accounting logic transferred 1:1 or optimized beforehand for their use in the system and in terms of content? This question relates to the previous one, because the supposedly easy 1:1 transfer of accounts from the TMS to ERP prevents an efficient use of the TMS's possibilities and frequently also the use of an automated interface, due to deviation from system standards.

Of course, the costs and benefits of an automated interface need to be evaluated on a case-by-case basis. To do so, the first step is to create transparency about the organizational setup. After that, an inventory of manual processes and controls needs to be taken and staff capacities evaluated at Treasury and in Accounting. Based on this information, the systems and related interfaces used in Treasury and Accounting will be investigated. This may even result in a complete reassessment of the TMS, if, for example, the current or original requirements have changed and the TMS has not been able to keep up with these developments. Even if it is perhaps not possible in the end to do without all manual activities, automation and standardization will have the effect of significantly reducing process risks and costs.

Author: Karin Schmidt, Senior Manager,

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