Millennium

Rules engine and subledger technology: what every CFO needs to know

Transform your processes and liberate your finance team 

From revenue recognition through to the treatment of leases – not to mention a raft of sector-specific rules and standards, the compliance burden faced by CFOs is growing year by year. Managing it requires effective internal controls, auditability and of course 100% accuracy.

Added to this, the routine reporting workload remains as relentless as ever. Familiar tasks such as reconciliation and final report preparation continue to consume a huge amount of time. In fact, currently, 87% of finance professionals are still obliged to work overtime in the run-up to the financial close.

Expectations of the finance department are also changing. With high volumes of valuable data at their fingertips, there is growing pressure to put this data to work and to use it to generate solutions to business problems. CFOs themselves are keen to find new ways to add value to their organisations. The trouble is, without streamlining routine operations there is rarely time for finance to contribute more fully and help formulate corporate strategy.

A subledger system integrated with an accounting rules engine can help overcome this deficiency. With this type of technology, transactions can be stored, processed and posted automatically to the general ledger. For the finance department, this means less time spent on manual tasks, increased accuracy and greater compliance with standards. It also frees up internal resources, providing more time to focus upon added value tasks and strategy.

This guide aims to provide an insight into the use of subledger technology, its benefits to the CFO, how it can help address specific compliance requirements and what should be looked for in a subledger.

Part 1: Subledger technology explained

The general ledger is the foundation of a company’s accounting system. As a key reference point for the finance team and other business insiders, keeping it accurate and up-to-date is essential.

For any large organisation however, hundreds or even thousands of weekly accountable transactions are not unusual. Many will be straightforward, while others will need to be processed in a particular way to comply with internal policies and with general accounting principles and standards.

Manual processing of these transactions can be both resource-intensive and subject to error and therefore an automated subledger approach offers more efficient processing.

Key characteristics of subledger technology:

• The subledger provides a database for logging, storing and processing a subset of double entry accounting records.
• Subledgers can be set up for any areas of the general ledger e.g. accounts payable, accounts receivable, fixed assets, product inventory and purchasing etc.
• An automated system allows multiple subledgers to be connected to the general ledger.
• Transactions are automatically generated and posted to the general ledger.

Transactions however are not always straightforward and it’s not always enough to merely summarise a group of transactions and post them to the general ledger.

This is where a rules engine can help. A rules engine is essentially a software tool that automates the steps that make up a business process. With a subledger solution, you can apply specific rules to determine the way in which transactions are processed (before they are posted to the general ledger) to comply with all relevant accounting principles and standards, internal policies, as well as handling what can often be complex multi-entity, multi-currency calculations. Rules can be set and then applied to ensure transactions are processed correctly.

Part 2: The benefits provided by using a subledger

More effective use of time and resources

Especially in the current climate, businesses demand up-to-date insights and new ideas. From workforce and asset deployment through to analysis of product-line profitability, they need to drive efficiency and identify new commercial opportunities. In all these areas, the CFO has an important role to play.

However, if the finance department is spending time mainly on routine tasks such as transaction processing, reporting and compliance, then there simply isn’t the bandwidth to devote to adding value to the organisation. What can be automated to deliver greater efficiency? This is the key question to be addressed by any finance department seeking to become more strategy-focused.

PwC highlighted the fact that in areas such as management reporting, tax and general accounting, there’s the potential to free up between 30 and 40% of time by introducing automation and process efficiencies. By dramatically reducing the time needed for manual transaction entry and reconciliation, subledger technology goes a long way to help the finance department become a valuable and trusted partner to the business.

Greater consistency and fewer errors

Subledger technology allows transactional data to be processed and automatically posted to the general ledger according to pre-defined rules. With large organisations and groups, it’s especially easy for processing inconsistencies to arise. Through universal rules, processes are rationalised, eliminating manual-entry error and inconsistency, providing increased confidence in the integrity of the financial results.

Enhanced compliance and auditability

Regulations such as IFRS15, IFRS16, IFRS17 and LDTI require finance departments to ‘show their workings’; to have their underlying operational data available for disclosure in order to demonstrate adherence to regulatory standards. Using the right subledger solution, allows drill down to the general ledger at transactional level and provides a full audit trail. Likewise, the rules set for data processing and accounting are transparent and easily verifiable. In the event of any regulator queries a solid foundation for compliance can be easily demonstrated.

An up-to-date financial picture

During the current year, the COVID-19 pandemic has demonstrated how quickly market conditions and expectations can change. The general ledger provides the foundation not only for accounting, but also for rolling budgets and forecasts. To provide the most value, it needs to keep up with what’s happening on the ground. Subledger technology reduces the time and manual input required for transactions to be fed to the general ledger. It helps transform the general ledger from a periodically revised accounting tool into a reliable and up-to-date information asset.

Enabling analytics and generating insight

The subledger’s primary purpose is to allow automated processing and data feeds directly through to the general ledger. But the general ledger doesn’t need to be the only destination for this data. Depending on the specific rules set, the rules engine powering the subledger effectively cleanses transactional data and ensures that data from multiple sources is processed in a consistent manner.

This helps the creation of a ‘ledger-certified’ foundation not just for statutory accounts but also for management reporting and analytics. As well as connecting to the general ledger, a feed can be set up directly from the subledger to data analytics or business intelligence tools of choice.

Part 3: Compliance troubleshooting: Subledgers and accounting standards in focus

Here is a closer look at how subledger technology can help tackle the compliance challenges raised by specific accounting standards and principles.

IFRS 15

The challenge

The ‘revenue recognition’ standard determines how revenue should be recognised and reflected in an organisation’s financial statements and balance sheet. It sets out a standard five-step model for recognising revenue effectively. For high volumes of long-term contracts with multiple elements, there is a considerable challenge in making a distinction between the different elements in the contract, recognising revenue for each of them.

The solution

At what point should revenue from a particular contract be recognised within the profit and loss and balance sheet? A subledger with a suitably configured accounting rules engine can help manage data processing, calculations, reporting and an automatic feed to the general ledger, complete with a clear audit trail. This ensures that consistent revenue recognition policies are applied, keeping the general ledger up to date, while also providing the ability to drill down into individual contracts to check data regarding, for instance, contract balances, performance obligations and contract costs.

IFRS 16

The challenge

IFRS 16 marks a once in a generation shift in the categorisation, calculation and presentation of leases for financial reporting purposes. The most obvious impact concerns the layout of financial statements: specifically, a wide range of financial liabilities that were previously held off-balance sheet as operating leases must now be shown on the balance sheet.

Behind this presentational change, there’s a significant and ongoing data management challenge. As a start, you need to identify and classify all leases that come into play within the business. For the relevant calculations, data must be standardised – often filling in the gaps arising from incomplete information. It can prove particularly resource-heavy where the information needed is spread across different departments and formats and these is extensive reliance upon spreadsheets.

The solution

A dedicated lease accounting subledger helps ensure that all relevant leases are appropriately accounted for on the balance sheet. The lease subledger will also need to include sections covering areas such as discounting of future lease payments, ROU asset depreciation and liability amortisation. This information needs to be accessible when needed without the general ledger becoming cluttered by detailed entries for each lease.

A subledger solution preconfigured for IFRS 16, allows automation of complex calculations (e.g. asset depreciation and applicable interest). It also means that all relevant information such as changes in rates or terms, extensions, renewals or impairments can be easily managed, without the need for multiple data entries.

IFRS 17

The challenge

The stated aim of the new reporting standard for the insurance industry is to provide greater transparency concerning an insurers’ financial position, performance and risk exposure. For insurers on the ground, this means collating and processing potentially enormous amounts of additional data, such as historical policies and an increased number of calculations. Given the volumes of data involved, the complex interplay of different categories of actuarial and accounting data and the calculations required, the sole use of a general ledger for accounting becomes practically unsustainable.

The solution

What’s needed is a subledger and accounting rules engine specifically configured for IFRS 17 compliance. The standard requires regular recalculation of the performance of applicable insurance contracts over their lifetime. A subledger solution can allow this to be carried out automatically, giving the ability to store the calculation results at each measurement period – and provide a fully auditable data trail.

Part 4: Choosing a solution

Start with your specific problem. If you already using an enterprise resource planning (ERP) system such as SAP or Oracle then you are likely to find that it has a subledger component. A good example is the S/4 HANNA-based subledger for SAP which provides a ‘catch all’ solution aimed at handling the regulatory and reporting requirements for financial institutions, insurance companies and similar enterprises.

Such solutions may carry impressive functionality, but because they are designed to handle a range of compliance needs, they often demand a considerable degree of bespoke configuration for them to address the problems to be solved. If there is the need for a quick implementation with a minimum of technical input, an out-of-the-box subledger solution configured for specific compliance requirements may be a good option.

Examples include the IFRS 16 lease management solution provided by Legerity and the IFRS 17 insurance accounting subledger from Aptitude.

Aim for seamless integration

Adopting a subledger solution does not have to mean a complete overhaul of your existing technology stack. Millennium Consulting specialises in helping equip you with the type of subledger technology that addresses your specific requirements, while ensuring full integration with existing systems.

Supporting wider transformation initiatives

Compliance is often the primary driver of subledger adoption however organisations may require a more efficient system to handle the increased data processing and calculation burden that the new standard brings. A compliance challenge may also be the springboard to achieve additional business benefits. The subledger provides a way to harness potentially enormous volumes of granular data and provides the opportunity to consider how else this data may be put to work for the purposes of analysis, forecasting and delivering timely business insight.

What next?

Starting with your specific goals and operational and requirements, Millennium Consulting can help you implement best-of-breed subledger technology and processes. To keep on top of compliance, assign finance team resources to more profitable use and to build the foundations for stronger business insight, speak to Millennium Consulting today to discover how we can support you.

The future of the cloud: key trends in focus

With IT departments facing budget pressures, we might have expected cloud adoption plans to be put on ice. But in fact, the opposite has been the case. Recent trends have shown that financial constraints actually strengthen the case in favour of cloud migration.

Here’s a closer look at why, despite a challenging business landscape, cloud-based digital transformation has continued apace…

The cloud and business survival
Business continuity was the big priority in the first half of the year. As lockdowns took hold, firms needed new solutions for communication, collaboration, as well as remote access to business data and applications. Cloud-based services proved pivotal in ensuring operational continuity.

In its global cloud services overview, Canalys found that spending on cloud infrastructure services jumped 11 percent in Q2 2020 compared to the previous three months, and was up 30 percent year-on-year.

Fast forward to the autumn, and most firms have already covered the basics to adjust to remote working. So does this mean we are about to witness a dampening down on cloud adoption? It seems not.

COVID-19 has forced organisations to reassess their strategic priorities. KPMG, in its recent Enterprise Reboot report found that whereas the emphasis back in March was on continuity, “the immediate focus is now on survival”. Companies are investing in the areas where their cash is likely to have the biggest positive impact.

This includes investment in technologies that help companies maintain customer and stakeholder trust, to keep remote workforces connected, and to ensure that businesses are prepared for further disruptions.

Business decision making is another priority area. To compete, businesses need the ability to react quickly to changing circumstances, which means the ability to query data at speed is essential. On top of this, IT architecture must be compatible with increasingly demanding data analytics methods.

It means that more than ever, organisations need data warehousing solutions that are powerful, scalable, flexible and secure. This is precisely the type of environment that the cloud can offer. 38% of companies plan to increase their cloud spend this year (up from 31% last year). Small wonder that cloud adoption is continuing apace.

Slow adopters change their attitude
Some sectors have been markedly more reluctant than others to embrace the cloud. Factors holding organisations back include regulatory compliance rules (especially over data storage), nervousness over data security, and fears over reliability and data availability.

The banking sector was traditionally seen more cautious than most when it came to the cloud. Now though, things are changing. As a couple of high profile examples, AWS has recently agreed a multi-year partnership with HSBC, while Google Cloud has linked up with Deutsche Bank. For the banks, the emphasis is on modernising their architecture, increasing their data analytics capabilities and creating a more personalised customer experience.

So what is driving the change of mind? Money plays a big part. Whether you’re a global bank or an SME, it’s often the case that switching to the cloud is a cheaper way to scale up your capacity and capabilities, compared to trying to overhaul your on-premise legacy architecture.

It’s also the case that the cloud itself has evolved. For instance, improved container technology makes it much easier to deploy multiple cloud providers as back up, significantly reducing the chances of an outage. On the security front, there’s also the realisation that tapping into the cyber security expertise of the likes of AWS, Google and Microsoft is likely to be a safer bet than relying solely on in-house security capabilities. As fears over reliability and security are reduced, the case in favour of the cloud becomes impossible to ignore.

Achieving success and managing expectations in 2020 and beyond
The cloud promises a lot. But organisations need to realise that cloud migration is not necessarily a quick fix for whatever challenges they happen to be facing.

A reminder of this came in a recent survey of 350 companies by security vendors Fortinet and supply chain specialists, IHS Markit. Of the respondents, 74% had migrated at least one asset into the cloud, only to later move it back into their on-premise infrastructure. The two top reasons for the reversal, cited by 52% of respondents, were performance and security.

Organisations migrate their data and applications to the cloud for a wide variety of reasons. For instance, it could be to support wider business transformation initiatives, to boost your storage capacity, to facilitate wider systems access, to reduce your IT spend – or a combination of all of these and more.

These days, with resources under pressure, it’s going to be more important than ever for businesses to take a planned, measured approach to cloud adoption. What do we expect from the cloud – and what do we want to do when we get there? Only once you have articulated this can you define the performance levels you need – and hone in on the specific cloud solutions you need in order to reach them.

Why Millennium Consulting?

Our cloud migration expertise – combined with innovative tools for data cleansing, mapping and reconciliation – ensure that your move to the cloud is as efficient and effective as possible.