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Integrating Treasury Management with Accounting

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January 25, 2016

Accountants may work with the treasury management function at some corporations, and being able to share information across functions can help executives make better decisions about investments.

“What we have seen over the last 18 months or so is a move for CFOs and treasurers to break down the barriers between accounting and procurement and the treasury group so they’re getting more of a real-time view into the risks and into cash visibility,” said Mark O’Toole, vice president of treasury and commodities solutions at the software company OpenLink. “If you’re on the treasury side, there’s a move toward centralization of this type of spend.”

Having visibility into forward commitments, purchases, hedging, budgets, and performance against the market can be key advantages.

“Many companies apply static hedging strategies,” said O’Toole. “A third of the ones that we’ve seen have contracts that they use within commodities that will remain the same regardless of the market developments. So they’ve locked in a strategy and, until it expires, they’re not going to do much with it, as opposed to putting in strategies to be able to adjust and actively manage them. They need the right tools in order to do that and see what the mark-to-market possibility is.”

Under both IFRS and U.S. GAAP, raw materials on the corporate balance sheet should be marked to market every quarter, according to O’Toole. “Negative changes in value are added to the quarter’s cost of goods sold,” he added. “Under IFRS positive changes can be subtracted from COGS up to the original value. Under GAAP positive changes cannot be added back to COGS.”

He believes unhedged raw materials can create unexpected hits to a company’s profits. For public companies, that can have an impact on their earnings per share and affect their market valuation.

“If you look at hedging specifically, there appears to be a limited understanding of risk,” said O’Toole. “Not all companies have a full understanding of where those risks lie and how to quantify them. A lot of companies tend to rely on assumptions about volatility, but they fail to properly identify how price movements across various categories relate to each other. If one goes up, does that mean the other one does? You have to be able to look at it a bit more holistically that way.”

He believes companies can reduce their spending by using systems like OpenLink. “It allows auditors at the click of a button to see who did what, when, where, why, how? It allows you to go back and do snapshots,” said O’Toole. “If four weeks ago you did a deal, what was the mark to market then? You can do that in much quicker fashion than paying for consultants to come in for long periods of time and get similar information. Plus, you’ve also reduced your compliance costs because you’re able to put in compliance and controls into the software that can reduce a lot of those errors.”

O'Toole pointed to the need for accounting systems to do proper valuations. "The difficulty for accounting systems is the ability to produce appropriate values at a discrete level so that those values (or sub-ledger/ledger entries) contain the appropriate level of designation and detail so that the values can be easily rolled-up for reporting purposes," he added. "The problem with most accounting systems is that they are not able to innately (and rapidly) generate and relate newly emerging “calculations”  (i.e. credit adjusted valuations, applicable effectiveness calculations/models), or produce them at a discrete level where complete transparency applies (i.e. accounted values are produced at a consolidated level with no underlying detail being available)."

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