This post does not deal with measures and tools to control the expenses and to be able to balance the accounts and meet the budgets. I’m sorry to disappoint anyone who has understood that from the title. It is more related to another post I wrote recently in which I talked about how to configure the value of stocks. It seems to me that in that article perhaps I left an implicit message that I did not intend to disseminate: that of the existence of a single and absolute cost value.
The technique of bridges is a study tool which is a step beyond the traditional horizontal analysis. It can be said that the latter is static, as it generates a data (sometimes appears as a percentage) but provides no further information. For its part, the analysis with bridges aims not only to display a value, but also explain it. Hence, precisely its name is a bridge between two data.
This is, therefore, an examination with great potential and that requires knowledge or the investigation of the origin of variations or deviations. Not enough to generate a value, but must give the reason or cause.
Let’s take a simple example. Suppose the budget of the Sales Department of a company for the year X and the actual expenditure for that year.
First, we perform the classic analysis.
The analysis with bridges explains the variations.
As seen in the example, bridges technique gives more information and reconciles data in a simple manner. It pretends to be very visual and schematic, so that we do not need narrative explanations.
The potential of analysis with bridges is high and has the following applications, among others:
– It compares different types of settings: allows you to compare the actual data with a budget for the same period; or the actual data with several consecutive periods; or the difference between various budgets …
– It analyzes one or more data at once: we can focus on the reasons for a single value such as sales, or make it wider and jointly analyze variations on sales, gross margin and profit. This second option is very rich (and appreciated by managers) and provides at a glance the impact of the mix, volume, price, overhead …
– It is applicable to different areas: although its origin is linked to the study of financial indicators can be used to address differences in all kinds of magnitudes: departmental expenses, personnel expenses, number of employees, customer complaints …
On January 13 the IASB (the International Accounting Standards Board) issued the International Financial Reporting Standard (IFRS) No. 16 which addresses the accounting of leases, and replaces the previous standard (IAS 17).
Although I was not able to review the content of this new regulation (incomprehensibly, the document is only accessible for paying subscribers of IFRS website), I have read the project summary and the effects analysis. The points that I would highlight are:
– A single lessee accounting model for operating and finance leases is established; this new model is more similar to the one indicated for finance leases in IAS 17. That is, when formalizing a lease (either operating or finance), the lessee must recognize an asset and a financial liability for the same amount, which is the present value of the payments agreed for the duration of the lease.
– The generated assets will be depreciated during the term of the lease, and the financial liability will be reduced as the payments to the lessor are processed, generating a financial expense (relating to the present value) which will be charged to the result.
– It disappears the lease expense to the Profit and Loss for those cases where IFRS 16 is applied.
– The modification has a neutral effect on the whole life of the lease; the total lease cost imputed to the result with the IAS 17 model shall be the same as the total amount of imputed depreciation expense plus the finance cost following the IFRS 16. Of course, differences in the recognized expenditure will arise in each year if using one model or another.
– The main target is that in the Balance Sheet assets and liabilities arise (already present in the case of an acquisition), improving the comparability between companies and reducing adjustments in the financial information by the user. The difference arose between firms that bought and those who rented.
– Effectiveness from January 1 2019, with the possibility of applying previously only if IFRS 15 is applied as well.
– Exceptions: This new regulation will not be applicable for short-term leases (12 months or less) or when the present value of the asset is low (in the order of magnitude of US $ 5,000 or less).
Some of the comments that can be raised about this model are:
– Application in the different jurisdictions: in the European Union, as an international standard, it will be effective for consolidated financial statements of listed companies. The FASB (the US national standard-setter) has worked closely with the IASB, and a new US lease standard should be released in 2016. But in most jurisdictions it has to be yet defined the regulatory framework (under what conditions and for which companies).
– Impact on SMEs: it must be considered whether the benefits of the new IFRS outweigh the incurred costs in the application by the small and medium size enterprises.
– Impact on key financial metrics: the implementation of the new requirement has a direct effect on magnitudes as used as EBITDA or working capital, for which new references and targets will be needed.
– We’ll have to see which the tax implications of this change are.