• It’s the most wonderful time of the year



    Today marks the beginning of the simbang gabi, a long-treasured Filipino tradition of celebrating a nine-day series of dawn masses before Christmas. While there have been some changes in the observance of the tradition over the last 600 years, the fundamental purpose of Filipino Catholics attending simbang gabi remains the same. It is basically to show devotion to the Blessed Mother and to spiritually prepare for the celebration of the birth of Christ.

    For most accountants, this time of year also represents an important occasion not only for simbang gabi, Christmas or even the coming New Year, but also because of year-end financial closing activities. The days leading to Christmas, particularly the same period covered by the simbang gabi, have been critical for accountants because they should make sure that all transactions have been appropriately reported in the company’s accounts. This period can prove to be really stressful not only for accountants who have to close their financial records for the year, but for the entire company as it scrambles to meet its revenue and other financial targets.

    To ease their stress during this season, we will discuss some areas that companies could focus on as they embark on their year-end financial closing activities.

    Reconciliation. In the Catholic religion, the faithful are encouraged to take the Sacrament of Reconciliation, or to hear confession to prepare one’s self for Christmas. In terms of year-end closing activities, preparing and reviewing reconciliation schedules are also critical to ensure completeness, accuracy, existence and proper classification of transactions.

    Inherent to an effective reconciliation process are the identification and timely resolution of reconciling items and a robust review of the reconciliation schedule. A best practice would be to observe a formal trace and escalation aprocess and in most cases, a threshold, for the review and disposition of reconciling items. In reviewing the bank reconciliation, for example, long-outstanding items may not only point to misstatements in the cash balance arising from errors, but could also indicate possible fraud.

    Estimates. Just as it is important to have the right estimate in the food we prepare for our Christmas parties, making reasonable estimates is a critical financial closing activity. Historical experience, contractual terms, company policies and accounting standards are among the considerations that management should take note of as they close their books.

    It is best practice for management to do an inventory of accounts, or transactions that involve making estimates to ensure that related policies are consistent with the requirements of relevant accounting standards. Moreover, the process allows management to determine which units within or even outside the entity should be involved. For example, determining the need to recognize the provision for legal expenses and the related estimate would normally require a legal counsel.

    Judgment. This time of the year is not only about deciding the best gifts for family and friends. Making critical judgment is an integral part of the period-end financial closing process.

    Judgment could involve determining the impairment of non-financial assets, classification of financial assets, recognition of revenue or even the entity’s ability to continue as a going concern. The list could go on so it is vital that management is involved in making critical judgments. Moreover, an important consideration that most companies should not overlook when making judgments and even estimates is the tax implication of such judgments and estimates. A good example would be deciding whether or not accrued expenses based on estimates would be considered as deductible expenses for income tax computation.

    Checklist. Santa Claus should not be the only one making a list and checking it twice. It is good accounting practice to have a period-end financial closing checklist to make sure all relevant activities are identified, properly assigned and completed on a timely basis.

    There is no one-size-fits-all period-end financial closing checklist. For a checklist to be an effective tool for an efficient and effective period-end financial closing process, it has to be tailored to the size and operations of the company. It is, therefore, essential that the checklist is prepared and reviewed by management at least annually. There might be changes in the business processes that would require activities, responsibilities and/or timelines in the checklist to be added, deleted or modified. Assigning responsibilities and setting up timelines to complete, review and monitor the checklist should likewise be considered.

    Business performance reviews. People normally become nostalgic as the year comes to a close. It is common to revisit the year that was and to take stock of whether resolutions have been kept, goals have been achieved and expectations have been met.

    Companies should not be any different. A good financial closing process should involve business performance reviews of financial statements and related disclosures. Such reviews include budget versus actual, and prior periods versus actual. Variances from expectation outside a predetermined threshold and unusual items should likewise be investigated and resolved in a timely fashion. Performing a disaggregated analysis of revenue movement, for example, would allow management not only to identify potential misstatements arising from error or fraud, but also revisit and adjust sales strategies.

    As the popular Christmas song goes, Christmas is the most wonderful time of the year. For accountants, however, this could also be one of the most dreaded times of the year. This should not be the case as long as appropriate planning is made and adequate controls are put in place to ensure a smooth year-end financial closing process.

    Catherine H. Santos is a partner from Assurance and the Assurance Transformation Leader of Isla Lipana& Co./PwC Philippines. Email your comments and questions to markets@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.


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