Category: კატეგორიის გარეშე

IFRS accounting represents bookkeeping based on international financial reporting standards.

What is the difference between IFRS and cash based (cash inflow/outflow on bank account) accounting?

In order to better see the difference, let’s discuss an example. Assume company, that manufactures furniture, carries out all its transaction through its bank account and has no cash-on-hand transactions. At the end of January, the company manager logs into internet bank and sees that during January: GEL 100,000 was received from clients on the bank account. On the other hand, the company transferred GEL 70,000 to its suppliers and paid GEL 10,000 in monthly salaries. Based on this, the manager concludes that company’s profit during January comprised GEL 20,000. This conclusion, which is based on the bank account turnover, is wrong and does not reconcile with IFRS accounting due to the following three reasons:

1. Apart from usual orders, in January, the company received orders from client firms on manufacturing and delivering furniture within the next two months. To fulfill the order, the company requested GEL 40,000 advance from the client firms and received the amount in January. Therefore, from total of GEL 100,000 that was received from clients in January, GEL 40,000 represented advances received from clients. As a result, the company’s actual revenue for January was not GEL 100,000 but GEL 60,000 (advances received from clients, GEL 40,000, represent next two-month revenues based on IFRS).

2. To fulfill the above discussed order within the next two months, the company ordered wooden materials to its suppliers for aggregate value of GEL 18,000. The materials were agreed to be delivered by the suppliers within the next five weeks. Therefore, out of GEL 70,000 transferred to suppliers, GEL 18,000 represented prepayments for materials to be received in the future. As a result, the company’s actual material expense for January was not GEL 70,000 but GEL 52,000 (prepaid amount, GEL 18,000, represents expense for the coming months).

3. From total transferred salary of GEL 10,000 in January, GEL 1,500 represents salary prepaid to one of the company’s employees. The employee asked manager to pay him next month’s salary in advance due to some urgent personal needs. As a result, the company’s actual salary expense for January was not GEL 10,000 but GEL 8,500 (prepaid amount, GEL 1,500, represents expense for the next month).

Conclusion

To sum up, in accordance with IFRS, the company’s loss for January was GEL 500 (GEL 60,000 revenue minus GEL 52,000 material expense and minus GEL 8,500 salary expense) and not profit of GEL 20,000. Unlike bank account turnover, IFRS enabled the company to see the actual financial result for the month.

We are often asked – why should I do budgeting? Budgeting is something that only big companies need, while small companies only have few transactions, and everything is clear even without a budget. But, is this so?

Why should a company have a budget?

Most of the people know that budget is a plan for future, however benefits of budgeting far exceed those of a simple forecast. We can tell from our own experience that budgeting has three crucial advantages:

Budgeting helps the management to clear their thoughts and express ideas in the form of a
plan

While carrying out his/her duties, a lot of ideas may come to the mind of a company’s director (manager) on what he/she could do in the future, how he/she can improve company product/service and increase profitability. For example, manager might think that it would be a great idea to form quality control department in order to improve product of service. Or he/she may think that it would be a good idea to stimulate sales through digital marketing. Budgeting is a tool for transforming these ideas in specific plans. Namely, during the budgeting process, manager is planning future revenues and expenses. Detailed budgeting of expenses pushes managers to transform one or more ideas that he/she has to a specific plan and input them in the budget. For example, manager could allocate funds for digital marketing in the budget and input the amount as a planned expense. Manager could also estimate salary expenses needed to form and run a quality control department and could input such expenses in the budget. If it turns out that forecasted revenues are insufficient to implement all the ideas that came to the manager’s mind, or in case of implementing all of them would lead to sub-optimal profits, then manager will be forced to prioritize the ideas and implement only those ones that he/she believes are more important. Therefore, it can be concluded that budgeting helps  managers to organize their ideas, transform them in specific plans and prioritize implementation timeline for ideas based on their relative importance.

Budgeting pushes managers to act

As noted above, company’s manager may come up with number of ideas regarding business development and related projects. However, often these ideas are never acted on. It is common knowledge that reflecting specific idea in a budget and translating the idea in specific numbers ultimately aids implementation of the idea, which aids company’s development and growth process. Besides, budgeting helps managers to forecast possible difficulties and plan respective measures to cope with those difficulties.

Budgeting helps to better understand and digest the company’s existing financial and non-financial position

During the budgeting process, in order to forecast the future, management is forced to dive deep into the company’s specific nuances and translate those nuances in specific numbers. During this process, management better acknowledges the existing resources, past experiences and most importantly, those key factors (so called “drivers”) that cause the company’s financial performance. As a result, management develops a better sense of existing circumstances and this aids more informed decision making in the future.

Conclusion

Budgeting is not a theoretical process with nominal value. Instead budgeting brings significant practical value to both large and small companies. Budgeting helps to organize thoughts, make better sense of company’s existing circumstances and pushes management to act.

What changed?

In 2018 important amendment was implemented in the field of finance, which significantly changed the state’s approach. Before 2018, apart from very small number of firms, companies did not have to publish their financial statements. Starting from 2018, state gradually introduced annual mandatory reporting.

Namely, companies were divided into four categories:

The first and second category entities became obliged to file 2017-year annual report no later than 1 October 2018.

Third category entities became obliged to file 2018-year annual report no later than 1 October 2019.

Fourth category entities became obliged to file 2020-year annual report no later than 1 October 2021.

What is the category assigned to your company?

Companies are assigned categories based on their sizes. The sizes depend on three criteria: 1) total assets; 2) revenues; and 3) average number of employees during the year. To be assigned a specific category, entity must satisfy at least two of the three criteria for that category. The below table will help you to ascertain your company’s category:

Does a mandatory audit apply to my company?

Based on the new regulations, the first and second category entities must conduct the mandatory audit. In other words, apart from the fact that the first and second category entities must publish their financial statements, they must also conduct an audit of those financials before publishing. As for third and fourth category entities, they do not have to conduct mandatory audit, which means that they only must prepare and publish financial statements, however they do not have to conduct mandatory audit before publishing.

What if my company fails to publish the mandatory annual report?

Failing to comply with the law will result in penalties. Failing to comply within one month from the receipt of warning notice from the state, penalty amount will double in size.