The COAs do not usually make a current/non-current distinction.
As an item's status as current or non-current is a reporting and disclosure, not recognition issue. For example, a receivable due in 90 days represents a claim to cash just as a receivable due in 730 days. Nevertheless, from an accounting guidance perspective, while a receivable is a receivable, a receivable with a long payment term also provides debtor financing, which the creditor must account for. Specifically, both IFRS and US GAAP require all receivables with a term of more than one year to be discounted and measured at present value.
Technically, as outlined in IFRS 15.62 | ASC 606-10-32-17, not every contract with a customer results in a claim to cash with a significant financing component that would require discounting. However a receivable (IFRS 15.106 | ASC 606-10-45-2: a right to an amount of consideration that is unconditional) would always require discounting unless the entity chooses to apply the practical expedient outlined in IFRS 15.63 | ASC 606-10-32-18.
Thus, the question is not whether an item's current/non-current status should be reported, but whether it should be given accounting recognition at the account level.
Both options are technically feasible. However, one introduces additional complexity and may even involve unnecessary effort. For example, in a current/non-current chart of accounts, a receivable with a 730-day term would be non-current. Then, when its term dipped below 365, it would be current and would need to be reclassified.
However, non-current receivables are measured at present value from inception to derecognition. Thus, when reclassified, the original 730-day receivable would have a different measurement basis than the other 30, 60, or 90-day receivables in the same account, even though they all now represent identical, unconditional claims to cash. Messy.
Obviously, nothing would prevent an entity from not applying the practical expedient and discounting all receivables. However, in practice, discounting is practically always reserved for receivables with terms extending past one year.
This begs the question: why have two separate accounts when a receivable is always a receivable, and its current/non-current status only influences its measurement?
The practical solution, a single natural account (receivables) on which all unconditional claims to cash would be recognized. To this account two attributes (a measurement attribute and a reporting/disclosure attribute) would be added. Not only is the solution simple and elegant, but it allows the item to remain on the original account untouched until derecognition.
Nevertheless, some accountants insist on a current/non-current COA (for valid reasons).
The Counterpoint
While a single-account, attribute driven solution can be considered "simple and elegant," many accountants stick to separate accounts for a few practical reasons:
- System limitations: not every ERP handles dimensions well. Many mid-range accounting systems generate financial statements directly from the COA structure. If it is not in a separate account, the software cannot "see" it as non-current.
- Trial balance clarity: a Trial balance is the "truth" for many auditors. If they see ¤100,000 in one account, they would need to dig into a sub-ledger to see that ¤50,000 of that is non-current. Separate accounts provide that visibility at a glance.
- The discounting reality: while the claim to cash is unconditional, the time value of money \( PV = \sum_{t=1}^{n} \frac{CF_t}{(1+1)^t} \) means that a claim to cash today is not a claim to cash in two years. From a reporting perspective, they are not comparable assets until that time gap closes.
As a dimensional COA will lead to the correct amount being reported in either case, this is a moot point.
Neverthless, some practitioners prefer to see PV clearly reflected in the G/L and TB, not just on the BS.
Since it is not our place to dictate judgment, in addition to the unclassified COAs, we also provide COAs that do make the current/non-current distinction.
The COAs include both nature and function of expense sections.
The COAs include both, but the accountant will always choose one.
Obviously, summation account #5 (total expenses) cannot comprise summation account #5.1 (expenses by nature) plus summation account #5.2 (expenses by function). That would be double counting.
Thus it is up to the user to select which of the two classification represents the accounts and which represents the attributes (dimensions) of those accounts.
While one works better, it is not the place of this page to prescribe how practitioners should apply professional judgment, both variations are presented.
While the decision is up to the practitioner, one variation has clear advantages
For example in nature : function account order, account #5.1.2.1.1.1 (Employee benefits / Wages and salaries / Wages) would capture the total amount of wages paid out. When some of those wages were paid out to production workers, attribute # 5.2.1.1.2.2 capture that amount so account #5.1.2.1.1.1, 5.2.1.1.2.2 (the comma separates the account from its attribute) could be mapped directly to the direct wages line item of the cost of goods sold section of a function of expense P&L with little effort.
In contrast, a function : nature order would require separate accounts for, for example, production wages, sale’s staff wages, administrative staff wages, R&D staff wages, marketing staff wages, repairs and maintenance staff wages, quality control staff wages, that would then need to be mapped to employee benefits, which would represent aggregate wages paid.
Note: as a bonus, allocating in nature : function order allows the allocation process to be accomplished by a simple, easy to adjust weighting. For, at the end of a period, 50% of total wages paid could be allocated to, for example, COS: Direct wages, 5% to COS: MRO, 5% COS: QC. 15% Selling expenses: Wages, 5% Administrative expenses: Wages, 5% R&D: Wages, 5% to Marketing: Wages.
Employee benefits are a good example.
Assume a very simple company with three employees (one in production, one in sales and one in administration) which it compensates in three ways: hourly wage, salary plus commission and monthly salary. Associated with these costs, it also incurs: social security and health insurance.
As each cost has a different measurement basis, it would be reasonable to use three direct payroll accounts : Wages 5.1.2.1.1.1 (hourly measurement), Salaries 5.1.2.1.1.2 (monthly measurement), Commissions 5.1.2.1.1.3 (measured by sales amount), and two indirect accounts: Social Security 5.1.2.1.4.1 and Health Insurance 5.1.2.1.4.2 (whose measurement is derived from the direct compensation amounts).
If the company decided to structure its accounts by function instead, it would need:
In Cost of Sales: Wages 5.2.1.1.2.2.1, Social Security 5.2.1.1.2.2.2 and Health Insurance 5.2.1.1.2.2.3.
In Selling Expenses: Sales Salaries 5.2.2.1.1.1.1.1, Sales Commissions 5.2.2.1.1.1.1.2, Social Security 5.2.2.1.1.1.1.3 and Health Insurance 5.2.2.1.1.1.1.4
In General and Administrative Expenses: Salaries 5.2.2.2.1.1.1.1, Social Security 5.2.2.2.1.1.1.2 and Health Insurance 5.2.2.2.1.1.1.3.
The better approach is thus to use nature of expense accounts for day-to-day recognition and measurement, in that these would be mapped to the function accounts for disclosure at the end of each period.
Assume the entity 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 employee benefit (nature of expense) accounts were:
Wages 5.1.2.1.1.1: 400,000
Salaries 5.1.2.1.1.2: 400,000
Commissions 5.1.2.1.1.3: 200,000
Social Security Tax 5.1.2.1.4.1: 300,000
Health Insurance 5.1.2.1.4.2: 100,000
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. The entity 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: 384,000 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: 100,000, General And Administrative/Office Staff Compensation 5.2.2.2.1.1.1: 180,000.00 and General And Administrative/Officer Compensation 5.2.2.2.1.1.2: 120,000
Commissions 5.1.2.1.1.3 to account Selling/Sales Staff Compensation: 5.2.2.1.1.1.1: 200,000
Social Security Tax 5.1.2.1.4.1 to accounts: Cost Of Sales/Direct Labor 5.2.1.1.2.2: 115,200, 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: 54,000, and General And Administrative/Officer Compensation 5.2.2.2.1.1.2: 36,000
Health Insurance 5.1.2.1.4.2 to accounts: Cost Of Sales/Direct Labor 5.2.1.1.2.2: 38,400, 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: 18,000, and General And Administrative/Officer Compensation 5.2.2.2.1.1.2: 12,000
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.
From a reporting perspective, a function of expense scheme yields better results.
Providing the minimum possible information, ABC and XYZ published function of expense P&Ls:
|
|
ABC |
XYZ |
|
Revenue |
100 |
100 |
|
Cost of sales |
60 |
40 |
|
Gross profit |
40 |
60 |
|
Administrative expenses |
30 |
50 |
|
Net income |
10 |
10 |
Again providing the minimum possible information, ABC and XYZ published nature of expense P&Ls:
|
|
ABC |
XYZ |
Revenue |
100 |
100 |
Material |
10 |
10 |
|
50 |
50 |
|
Services |
10 |
10 |
Depreciation |
20 |
20 |
Net income |
10 |
10 |
In a nature of expense P&L, production and administrative employee benefits are not distinguished from one another.
Of the two formats, which would allow financial statement users to better assess the entity's operating efficiency?
Note: this issue is explored in more depth in the overall section of this page.
A combined approach leads to the best results.
To reflect that both nature and function of expense reporting have merits, ASU 2024-03 (ASC 220-40-50-6) updated US GAAP disclosure guidance to require entities to disclose nature of expense items in the footnotes.
From an accounting perspective, this makes a chart of accounts that captures both nature and function of expense information necessary for compliance with both US GAAP and IFRS.
Technically, IFRS 18 always requires key information by nature of expense. Presenting operating expenses by function (as under IAS 1) remains optional, even though practically all IFRS reporters do present expenses by function in their financial statements.
The COAs use a delimited account numbering scheme.
Since the traditional approach to COA design is sub-optimal, this page takes a more contemporary approach even if it does involve an RAE.
The recursive aggregation engine.
The remainder of this page is available in Pro view.