The Importance of Ledger Accounting at Month-End Close

Time and time again we have clients coming to us that use spreadsheets, or non-functional IFRS 16 lease accounting software solutions, with the complaint that their numbers are changing and affecting their month-end. Obviously, that’s a problem. But why exactly, and what can be done about it?

The importance of your month-end process

The month-end close is an important accounting task where organisation’s wrap up all their financial activities from the previous month. It's like tidying up the financial books to get ready for the next month.

During this process, clients go through all the financial actions they took, process everything, and make sure everything reconciles. The goal is to make sure every transaction is recorded accurately. This helps close the financial records for that month and start the next month with a clean financial slate.

The month-end close is a key point in time. It's important because it helps organisations consistently provide accurate financial information. Checking and balancing the accounts every month helps leadership teams understand their business better, plan for the future, as well as catch and fix any mistakes before they become bigger problems. It also lets them see how well the business is doing financially.

When the month-end process is completed, it boosts confidence in the reported financial numbers, making sure they are correct and trustworthy. Like any important deadline, the month-end close might feel a bit stressful for the company. However, with good preparation and the right systems, it becomes a dependable source of information and a key control point.

Does your system have a period lockdown functionality that can align to your ERP process?

Unfortunately, with IFRS 16, many companies are overlooking the importance of the month-end close and instead are focused solely on the actual calculation of the lease amortisations and associated journals. These are key transaction items, but when done in isolation of the month-end process they can be seriously problematic, causing your numbers to change.

This happens because many systems (and of course spreadsheets) have no concept of time and simply perform the calculations with the data available at that point in time. This is ok for real time reporting but within IFRS 16 there is a concept of a modification date, which is when the contractual obligation infers the change in accounting treatment. This means that often many items, such as rent reviews, can actually have an accounting modification date that is in the past. Without a proper month-end close this will lead to your numbers changing.

Lease accounting modification example

For example, if there was a rent review in March, but it was not agreed until May and then not passed to finance until June, there would be several additional journals to do to get the year-to-date correct in the ledger by June. A spreadsheet would simply assume the transaction was processed in March, and many systems would do the same. This means a human needs to do a reconciliation, work out the difference and post these differences, thus adding additional work that is not necessary with the right system.

However, for those with a system that has a genuine ledger process and month-end close functionality, the steps should be as follows:

1. The entire transaction would be calculated and would look to be posted in March.
2. If the March period was closed, all the entries from March to the current open period would be posted in the open period.
3. So, in this example, all the amortisation entries from March to June would now be entered into June and anything already posted would be reversed.
4. Straight away the reporting would agree and there would be no requirement for a reconciliation.

Herein lies one of the key benefits of LOIS, Quadrent’s lease accounting software. The multiple ledgers allow for a full month-end close process which can also be different for different ERPs or chart of accounts. Thus, once the processing is done and the period is closed, the system will automatically undertake the above steps for a full and complete accounting record. No manual entries, no reconciliation requirement, and a natural check to the real time reporting for the year-to-date position.

Get organised and save time with LOIS, delivered by Quadrent

Companies should be looking to optimise their month-end and year-end processes, if they haven’t already. By taking the time now to ensure your lease management systems and processes are efficient and robust, you can realise a range of strategic, financial and operational efficiencies that compound over time.

Quadrent works with businesses helping them to manage their leases and improve IFRS 16 compliance with their lease accounting solution, LOIS. With a team that has in-depth leasing knowledge and specialised accounting backgrounds, we’ll help you get the most value out of your assets.

To optimise your processes and leverage your data for better commercial decision-making, click here for more information.