Create a framework for aligning accounting policies: PwC

Observations from the front lines

Establishing a framework for updating and aligning accounting policies is more important now than ever due to:

Increased transaction activity and capital-raising events (IPOs), which are transforming companies, requiring them to create new policies and refresh old policies.
ERP changes requiring companies to develop new and additional procedures and guidelines to standardize future changes.
Increased volume and size of strategic acquisitions, including mega deals and cross-sector acquisitions. There are many recent examples of large vertical acquisitions, whereby a large or established company in one industry targets a company in an entirely different industry.
Recent changes to several key accounting standards, including:
- ASC 606 (Revenue Recognition)
- ASC 842 (Leases)
- ASC 326 (CECL)
- ASC 350-40 (Cloud Computing)

Three best practices for accounting policy alignment

1

Standardized processes aimed at consistency and compliance.

2

Effective governance and project management, including broad stakeholder involvement.

3

Careful assessment and processes to allocate ownership for policies and procedures throughout the organization.

Why it matters

By establishing a policy alignment framework for the entire business, organizations can consistently and more efficiently implement new policies, perform updates and address diversity in practice. Key benefits from streamlined and harmonized policies include:

Increased standardization by proactively anticipating the impact of future accounting changes.
Avoiding SOX/internal control deficiencies through standardized controls.
Greater preparedness for SEC reviews or comment letters.
An established and consistent framework for evaluating accounting issues when they arise.

The combination of transaction activity and sweeping regulatory change often requires some level of policy and process modifications and alignment. In some cases, system updates may also be needed. Amid one of the longest running M&A cycles in recent history, newly structured companies will benefit substantially from a fresh and careful look at their processes for policy alignment.

While many companies do a good job setting initial policies, keeping up with both regulatory changes and deals can be a challenge. Accounting policy alignment requires not only a sound written policy, but also a framework to ensure that policy is implemented and updated as needed. That framework should assign ownership for policy fundamentals to corporate-level senior management, while business units or departments take responsibility for setting (and resetting, as needed) implementation procedures. Important fundamentals for alignment include leveraging key stakeholders, establishing processes for identifying updates, managing policy changes, and ensuring that policies and procedures are integrated into the business (i.e., by using an accessible app instead of an unopened binder on a shelf).

Examples: Questions when aligning policies to accounting change

ASC 606: Is the process for applying the 5-step model applied consistently across business units and revenue streams? Policies should be written based on the 80/20 rule, with separate processes to address the 20%.

ASC 842: Capitalization thresholds may have been generated years ago and may now need to be revisited based on new guidance. As companies determine thresholds, they will benefit from early input from business unit stakeholders. Companies will also need to consider the process for updating and maintaining any established thresholds.

Beyond the minimum

ASC 805 (Business Combinations) sets the floor for policy alignment. Acquirees need to conform their accounting policies to the acquirer’s policies, unless there is significant justification for differences. Sometimes companies do only the minimum for reporting compliance, however, a more thoughtful and proactive approach has significant benefits. A close look at policy alignment following acquisitions or divestitures is particularly important for cross-sector activity.

A more holistic process avoids the limitations of acquisition-specific or divestiture-specific alignment. By aligning not only the acquirer and the acquiree, but also the acquiree and fellow subsidiaries and business units, companies can generate valuable efficiencies and savings. This approach also ensures that following a future divestiture, companies can more efficiently eliminate policies no longer relevant.

Consistency and compliance

Consistency is the foundation for sustainably monitoring compliance and effectively implementing policy updates. Not only do companies need to ensure policy alignment in accordance with applicable accounting standards, whether that be Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), they must also consistently roll out those policies, guidelines, and corresponding updates across the organization. This is especially critical for companies that have been through recent significant change, and may not yet have aligned policies and guidelines, or for companies that have not revisited their policies and guidelines in a long time.

Cross-border transactions create an additional layer of complexity. For multinationals, having a formalized policy for statutory purposes is just as important as a centralized GAAP accounting policy. As companies increase their global footprint through cross-border acquisitions, they will need to contemplate the reporting requirements of the new subsidiary. For example, the subsidiary may be under IFRS, which differs from US GAAP, and the subsidiary may also have local country GAAP-specific requirements.

Project governance and stakeholder buy-in

Without effective governance and active executive sponsorship, policy alignment efforts can easily end up on the back burner, leading to delays, increased costs, and compliance risks.

Alignment also requires broad stakeholder involvement. Too often, accounting guidelines are drafted in a vacuum, without consideration of standard operating procedures (SOPs), operational requirements, and external auditor agreement. This creates confusion and delays, and can lead to compliance risk. A well-managed policy alignment project should include early and ongoing communications with key stakeholders to obtain buy-in and avoid disconnects.

Additionally, change management plays a critical role, as policies can quickly become stale due to changes in the accounting, ERP system, or transactions. Therefore, it is important to have clearly defined guidelines regarding ownership and responsibility as it relates to both the initial set-up and the change management protocols.

Ownership issues to consider

Companies should carefully evaluate their processes and culture to determine ownership of decisions and judgments. Understanding how policies and procedures will be reviewed for consistency and accuracy is also critical to eliminating and decreasing risk, especially the risk of conflicting interpretations. As mentioned earlier, policies are typically defined at the corporate level by senior management, while guidelines/procedures are typically defined at the business unit level by mid- and lower-tier management. For example, consider:

Accounting changes: Should GAAP changes be considered and reviewed at the corporate or business unit level?

Approval: Who approves changes to policies? Who approves changes to guidelines/procedures?

Consistency: Who is responsible for ensuring consistent and accurate application?

Maintaining policies:

Are policies maintained at the corporate or subsidiary level?
What platform is used to maintain the policy? A collaboration platform, web-based platform, or other?
Is there a centralized repository for company-wide policies, or are individual policies manually provided to each business unit?

Automation:

Are there opportunities to use existing or new technology
Processing of policy updates — automated versus manual.

We are seeing companies conduct automation workshops to brainstorm and identify opportunities to automate existing manually driven processes. Companies revisiting or developing accounting policies could consider doing such a workshop to identify areas for process improvement.

Organizational change

Organizational change is inevitable and is a big part of policy alignment. Examples may include:

Hiring a Director of Technical Accounting.
Forming a centralized technical accounting and policy department.
Designating subject matter experts within each region who can help navigate both the relevant GAAP and statutory requirements.
Designing a training and communication plan to ensure policies and procedures/SOPs are understood.
Identifying process owners to ensure the revised or new SOPs are designed and implemented.

These changes will require the right level of executive sponsorship to be successful.

How PwC can help

PwC has extensive experience with thousands of policy alignment and development projects in multiple industries. We have an established approach to help companies navigate accounting change in a systematic and measured way. We can offer industry insights on accounting policies and practices and help your organization establish robust policies, procedures, and processes. Contact us to learn how we can assist with your accounting policy challenges.

“Observations from the front lines” provides PwC’s insight on current economic issues, our perspective regarding the financial reporting complexities, and what companies should be thinking about to effectively address those issues.