We usually starts our training courses on finance with a discussion of IFRS applicability for management accounting purposes. The argument in favour of harmonizing two accounting systems (financial and management) is to avoid unnecessary discrepancies in income that need to be explained to management. It is a kind of 'lean' accounting that saves finance department resources for reconciliation. However, there are management accounting methods that are fundamentally contrary to the IFRS principles, though they are useful for obtaining a new look at the business.
Example #1. Different approaches to cost classification
Accounting standards provide for three main ways to classify costs (Figure 1):
Figure 1. Cost classification for financial reporting purposes
Figure 2. Example of cost classification in financial reporting
The classifications described above can also be found in management reporting. However, management accounting has its ‘own’ cost breakdowns which are not mentioned in IFRS:
Outcomes:
#1. IFRS is a good methodology because it has been proven by experience, but not everything needs to be accounted in compliance with IFRS. For the sake of success in business, it is possible and even necessary to deviate from IFRS, but only in management accounting.
#2. It is important that the finance function listens to its internal clients (business line managers) and understands the real reasons for calculating costs. The essence of the business task determines the choice of cost breakdown. If the problem is not understood correctly, then either the business line manager will get useless information, or the financial manager will have to stay at work and redo his/her analysis. In both cases, the company loses time to make the right decision.
This topic is studied in more detail in CIMA Diploma in Performance Management courses.
Svitlana Zasukhina
Trainer, Senior Manager, MBA, CFA, ACMA/CGMA, CIA, PwC Poland
Trainer, Senior Manager, MBA, CFA, ACMA/CGMA, CIA, PwC Poland
Tel: +48 519 062 937