UNDERSTANDING FINANCIAL, MANAGERIAL,

AND REGULATORY ACCOUNTING

AND REPORTING CONCEPTS

NIGEL A.L. BROOKS

THE BUSINESS LEADERSHIP DEVELOPMENT CORPORATION

Article reprint
 UNDERSTANDING FINANCIAL, MANAGERIAL, AND
REGULATORY ACCOUNTING AND REPORTING CONCEPTS

Every enterprise has to file regulatory reports with both Federal and state
agencies. Managerial reports are necessary for internal control and
decision making, and financial reports are necessary for investors and
creditors such as financial institutions. Financial, managerial, and
regulatory reports should be reconciled to ensure that the differences
between information reported externally and internally, and vice versa,
are fully understood.

The reporting burden on enterprises and their associated business and legal
entities is significant.

An enterprise consists of one or more business entities for which

management has to keep accounts and report financial condition and
performance to regulators such as the Internal Revenue Service (IRS) and
the equivalent state revenue agencies. Those enterprises that have
employees must report payroll information to the IRS, the Social Security
Administration, and state revenue and unemployment agencies. Those
enterprises that sell securities must report financial condition and
performance to the Securities and Exchange Commission (SEC). Reports
may also have to be filed with the United States Immigration and
Citizenship Services, the United States Department of Labor, the United
States Bureau of Customs and Border Protection, and various other
Federal and state agencies. Counties and municipalities may require
reports too. Those enterprises doing business outside the United States
may have to file reports to foreign governments. Taxes, duties, and fees
are paid either with the report filings, or separately, depending on
regulatory requirements. If paid separately, the payments have to be
reconciled to the report filings. Legal entities may have to report financial
condition and performance to regulators such as state corporation
agencies.

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Management must measure both financial and non-financial performance
within and across the various entities that make up an enterprise on
whatever schedule is necessary to conduct business. The reports that are
prepared for internal use should be available on a "need to know" basis.
Indicators for financial performance measurement include revenues, costs
and expenses, profits, cash flows, and returns on investment. Financial
measurements are based upon rates, quantities of input, volumes of output,
and aging. Financial performance must be evaluated in terms of non-
financial measures, such as market share and penetration, product usage,
employee and customer satisfaction, quality, time-to-market, cycle time,
and asset utilization. As information systems become more real-time
oriented, some reports may be available on demand.

Management must also report financial condition and performance to

external investors and certain creditors such as financial institutions, and
to the SEC and other regulators when applicable, that are in conformity
with Generally Accepted Accounting Principles (GAAP). These reports
are prepared according to standards for which the financial condition and
performance of the enterprise can be measured against others on a
consistent basis. These reports include financial statements of cash flow,
income, and condition (balance sheet). The accompanying notes are an
integral part of the financial statements, and contain items such as
commitments and contingencies that may have a significant impact on the
future financial condition of the enterprise. Management must be cautious
about the use of non-GAAP measures in external financial statements.
However, there may be rare circumstances where it is necessary to depart
from GAAP if a material misstatement would otherwise occur. In such
cases, the causes and effects must be disclosed. Estimates and judgments
must be used on a consistent basis.

In the United States, GAAP is influenced by the SEC, the Government

Accounting Standards Board, the Financial Accounting Standards Board,
and the American Institute of Certified Public Accountants. Other
countries have their own equivalent of GAAP. The International
Accounting Standards Board develops international financial reporting
standards.

In the ideal world, financial, managerial, and regulatory reports would be

prepared from a set of accounts in a single database. In reality, this may
not be practical because of limitations in accounting processes and
systems. However, whenever reports are prepared, regardless of source,
they must be reconcilable, and the differences must be understood.

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Whatever the reporting needs of management, attention must be paid
internally to what is being reported externally, because if the information
is necessary for external parties, it must be relevant internally.
Management should also be aware of internal financial information that is
non-GAAP based from differing treatment of period and product expenses.

Severe penalties can result from erroneous information reported

externally, especially to regulators, investors, and financial institutions.

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Financial Accounting and Reporting Concepts:

● Business entity assumption - the entity for which accounts are kept
and reports are prepared

● Going concern assumption - the entity will operate indefinitely

● Monetary unit principle - accounting and reporting is in a stable

currency, unadjusted for inflation

● Periodicity principle - reports are prepared in consistent time periods

● Revenue recognition principle - accrual basis (revenue is recognized

when realizable and earned) or cost basis (revenue is recognized
when cash is collected)

● Cost principle - acquisition cost is recognized except for certain

assets and and almost all liabilities that are recognized at fair value

● Matching principle - expenses (expired costs) incurred to generate

revenue must be matched with earned revenue in the same period -
until revenue is earned, expenses incurred to generate revenue are
capitalized as product costs (fully absorbed or inventoriable)

● Conservatism principle - when alternatives are available, methods are

based on recording the higher expense or lower revenue, or the lower
asset or higher liability

● Consistency principle - same principles and methods are used from

period to period

● Disclosure principle - relevant information must be reported in

financial statements and notes

● Materiality principle - significance of items must be considered when

reported

● Objectivity principle - financial statements are prepared from reliable

and traceable sources

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Managerial Accounting and Reporting Concepts:

● Plans and budgets

● Sales funnel for submitted, presented, and closed proposals (booking

of unearned and earned revenue)

● Cost allocation and transfer pricing

● Standard costing

● Variable (direct) costing

● Marginal costing

● Activity-based costing

● Functional, process, product and/or service, and market costing

● Project costing

● Branch and departmental reporting

● Cost, profit, and responsibility center reporting

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Regulatory Accounting and Reporting Concepts:

● Taxes (employment, excise, franchise, income, property, sales, use,

and withholding)

● Customs duties

● Fees

● Licenses and permits

● Employment

● Environmental

● Insurance

● Real estate

● Securities

● Zoning

When reconciling regulatory reports to financial reports, attention must be

paid to uniform capitalization rules (UNICAP) as adopted by the IRS,
which differ from GAAP.

When reconciling managerial reports to financial reports, attention must

be paid to differences in revenue and expenses by time period resulting
from those non-GAAP managerial accounting techniques that do not
employ the matching principle. Techniques such as variable (direct)
costing and marginal costing do not because they expense fixed costs
within periods instead of against products.

Understanding financial, managerial, and regulatory accounting and

reporting is an enterpriship (entrepreneurship, leadership, and managerial)
competency.

***

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About Nigel A.L Brooks...

Nigel A.L Brooks is a management consultant to entrepreneurs, business

enterprise owners, executives, and managers, and the enterprises they
serve. He specializes in developing the entrepreneurial, leadership, and
managerial competencies that build sustainable advantage from vision to
value. He is an author and a frequent speaker.

He obtained his professional experience as a partner at Andersen

Consulting (now Accenture, Ltd.), as a vice president at Booz Allen
Hamilton, Inc. (now Booz and Company), as a senior vice president at the
American Express Company, as president of Javazona Cafes, Inc., and as
president of The Business Leadership Development Corporation. He has
been a contributing editor for the Bank Administration Institute magazine,
and has served on boards of entrepreneurial networks. He was educated at
the University of Exeter, Devon, United Kingdom.

His clients are in the financial services, food services, high-tech,

manufacturing and distribution, pharmaceuticals, oil and gas, professional
services, retail and wholesale, transportation, and government industries.

He has experience in North and Latin America, Europe and Asia-Pacific.

www.nigelalbrooks.com

About The Business Leadership Development Corporation (BLD)...

The Business Leadership Development Corporation is a professional

services firm that works with entrepreneurs, lifestyle business enterprise
owners, executives, and managers, and the enterprises they serve.

BLD develops entrepreneurial, leadership, and managerial competencies

that achieve performance excellence by building sustainable advantage
from vision to value through:

 Strategic Management Consulting

 Executive Coaching and Mentoring
 Professional Training via The Center For Business Leadership
Development (CBLD)
 Motivational Speaking

www.bldsolutions.com

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