The Controllers role is becoming more crucial especially in midmarket and late stage companies. As the custodian of a company’s financial health, Controllers have to put in place good accounting policies to ensure accuracy, compliance and efficiency. These policies not only protects the financial health of a company but also help in making strategic decisions and meeting regulatory requirements.
Below are key accounting policies Controllers should focus on to preserve the financial health of the company and its growth.
Revenue Recognition Policy
At the heart of financial reporting lies the Revenue Recognition Policy. This policy is required for meeting accounting standards like ASC 606 or IFRS 15 - which focus on revenue recognition. It should define the criteria for recognizing revenue from customer contracts including identification of performance obligations, transaction price determination, and allocation. It is important to have a well defined Revenue Recognition Policy to ensure that your revenue is not only recognized in the right period but consistently. With this policy in place you'll have an accurate reflection the true state of your company’s financials.
Expense Recognition and Accruals Policy
Controllers need to have an Expense Recognition and Accruals Policy to ensure that expenses are recorded in the period in which they are incurred, adhering to the matching principle. This policy should detail the rules on accrual accounting and the treatment of expenses such as rent, utilities, salaries, prepaid and accrued expenses. Having clear guidelines for expense recognition is important for proper financial reporting and cash flow and budgeting management.
Fixed Asset and Depreciation Policy
Managing a company's fixed assets requires a comprehensive Fixed Asset and Depreciation Policy. This policy should cover how to treat capitalization, classifying assets, depreciation expenses and the lifespan of assets. It also needs to cover procedures for asset management on disposal and impairment of assets. By specifying the rules for accounting for fixed assets, Controllers can guarantee the compatibility of the reporting and maximize the tax proceeds as well as make the right investment decisions.
Inventory Valuation Policy
For those with physical products, an Inventory Valuation Policy is a must. This policy defines how inventory is to be recognized and accounted for including the methods such as FIFO, LIFO or weighted average cost. It also includes the provisions for physical counts, write downs for obsolete inventory and allocation of costs. A clearly defined Inventory Valuation Policy is useful in determining the cost of goods sold and the inventories which are relevant in measuring the company’s profitability and financial position.
Capitalization vs. Expense Policy
The classification of an expense as an asset or immediate expense has a big impact on the financial reports. As such, the Capitalization vs. Expense Policy should provide the criteria based on amounts, type of costs and expected benefits. This policy helps in the consistency in the treatment of investments, repairs, maintenance and development expenses which in turn affect the company’s earnings and its tax obligations.
Debt and Equity Instruments Policy
This policy defines the recognition and measurement of debt and equity instruments as well as the changes and conversions thereafter. It is important for Controllers to verify that such transactions are properly documented to reflect the company’s financial structure and financial position. This includes the accrual of interest, the recognition of debt issuance costs and equity based compensation.
Internal Control and Compliance Policy
This policy ensures that internal controls are in place to protect assets, report accurate financial information and meet legal requirements. This policy should include risk analysis, control, information system and communication and evaluation. Having a good internal control system is critical in ensuring that financial reports are accurate and to avoid fraud.
For Controllers of midmarket and late stage companies, these accounting policies are crucial to develop and sustain. They are the strategic tools that guarantee financial discipline, and support management decisions and build trust in stakeholders. The development of these policies is a complex process that requires a clear understanding of the legal framework and the company’s business processes. Controllers should ensure their companies are well protected and in a position to grow and develop.
FAQs
1. Why are accounting policies especially important for midmarket and late-stage companies?
Accounting policies become increasingly crucial as companies grow because they ensure accuracy, compliance, and efficiency in financial reporting. They not only protect the company's financial health but also support strategic decision-making and help meet regulatory requirements as the organization faces more complex financial situations.