Basic Universal COA

Although it is an IFRS/US GAAP advisory firm, the owner of this web site is a legal entity domiciled in the Czech Republic. As a result, it must use CZ GAAP for statutory accounting purposes.

While we do not have similar, in-depth experience with other member state accounting laws, since the Czech Republic is subject to the same EU directives and regulations as all other member states, its accounting legislation is generally comparable.

Please note: even though we have a world-wide subscriber/client base, we to not claim to be experts in any national GAAP, nor can we advise any entity on how these rules and regulations can or should be applied.

For example, instead of numbers:

A company could use letters:

Any scheme that facilitates machine readability (i.e. XBRL concept names) would, from a technical perspective, be permissible.

However, to put it plainly, most accountants consider anything but numbers really, really weird.

In contrast, delimitation allows infinite expandability.

For example, one of our clients, a shipper with over 200 mid-sized and 600 full-sized trucks, wanted to recognize each truck at the COA level.

While not optimal, a delimited account number does make this approach possible.

As anyone who regularly deals with IT professionals eventually realizes, the seemingly impossible can become possible if management shows steely resolve and brings the full force of its decision making authority and budgeting power to bear.

Ours is not the first web site to number its COA using periods.

Canadian Statistics (link: statcan) has been using this format since at least 2002.

And no, we did not copy it from them. We found this COA on the internet while doing research on how different countries approach the issue of national charts of account.

Assume XYZ company recognized period direct compensation costs of currency unit 1,000,000. In addition, it incurred social security tax and health insurance costs at rates of 30% and 10% respectively (for simplicity, also assume that production wages are expensed as incurred rather than being capitalized to inventory).

At the end of the accounting period the balances on the emplyee benefit (nature of expense) accounts were:

Wages 5.1.2.1.1.1: CU400,000

Salaries 5.1.2.1.1.2: CU400,000

Commissions 5.1.2.1.1.3: CU200,000

Social Security Tax 5.1.2.1.4.1: CU300,000

Health Insurance 5.1.2.1.4.2: CU100,000

XYZ next determined that its production workers spent 90% of their time on production and 10% on repairs and maintenance, in that 40% of that maintenance was performed on delivery equipment. XYZ also determined that 25% salaries were paid to sales staff with the remainder paid to administrative workers, split 60%/40% between office staff and officers.

To prepare its (function of expense) financial report it allocated:

Wages 5.1.2.1.1.1 to accounts: Cost Of Sales/Direct Labor 5.2.1.1.2.2: CU384,000 and Selling/Repairs And maintenance 5.2.2.1.3.3 CU16,000

Salaries 5.1.2.1.1.2 to accounts: Selling/Sales Staff Compensation: 5.2.2.1.1.1.1: CU 100,000, General And Administrative/Office Staff Compensation 5.2.2.2.1.1.1: CU180,000.00 and General And Administrative/Officer Compensation 5.2.2.2.1.1.2: CU120,000

Commissions 5.1.2.1.1.3 to account Selling/Sales Staff Compensation: 5.2.2.1.1.1.1: CU 200,000

Social Security Tax 5.1.2.1.4.1 to accounts: Cost Of Sales/Direct Labor 5.2.1.1.2.2: CU115,200, Selling/Repairs And maintenance 5.2.2.1.3.3 CU4,800, Selling/Sales Staff Compensation: 90,000, General And Administrative/Office Staff Compensation 5.2.2.2.1.1.1: CU54,000, and General And Administrative/Officer Compensation 5.2.2.2.1.1.2: CU36,000

Health Insurance 5.1.2.1.4.2 to accounts: Cost Of Sales/Direct Labor 5.2.1.1.2.2: CU38,400, Selling/Repairs And maintenance 5.2.2.1.3.3 CU1,600, Selling/Sales Staff Compensation: 30,000, General And Administrative/Office Staff Compensation 5.2.2.2.1.1.1: CU18,000, and General And Administrative/Officer Compensation 5.2.2.2.1.1.2: CU12,000

Besides a simpler account structure, this approach also allows individual expense to be recognized, day-to-day, by relatively inexperienced staff, while the period end allocations can be performed (supervised) by personnel well versed in the nuances of IFRS and US GAAP guidance

Similarly, as many national GAAPs prefer or prescribe nature of expense recognition, this approach works well at local subsidiaries of (especially) US based companies, that the day-to-day accounting can be performed by local staff (accountants trained in the local GAAP), while the period end adjustments can be performed by reporting specialists (staff trained in US GAAP and/or IFRS).

Obviously, since knowledgeable does not necessarily require presence, the local accounting staff can perform their tasks locally, while the reporting specialists can perform their tasks in close proximity to the management responsible for the final reports.

Not that a nature of expense P&L doesn't have a use.

Assume two otherwise comparable companies report the following results:

From the perspective of a taxation authority, it is fairly obvious that ABC would be a much better candidate for an tax audit, since the likelihood of, for example, non-tax deductible expenses being misclassified as tax deductible in material is higher than in payroll.

For this reason, nature of expense P&L statements are often required in countries where national GAAP is used as the basis for tax reporting and is likely the major (unwritten ) reason why IFRS allows nature of expense only disclosures while US GAAP does not.

The FASB's XBRL (link) requires function based classification:

Cost Of Goods And Services Sold

Selling And Marketing Expense

General And Administrative Expense

Within each function, it then sub-classifies expenses by nature, for example employee compensation:

Cost Direct Labor

Sales Commissions And Fees

Labor And Related Expense

Under IFRS, companies may present a profit and loss statement classified by nature only.

Even when they decide (as most do) to present a function of expense P&L, the information is presented in two separate lists, making it nearly impossible to allocate, for example, employee benefits to functions like cost of sales or administration, a problem compounded by the general lack of granularity in IFRS reports.

The IFRS's XBRL uses such an either or format: (link)