Accounts Reconciliation

Training

V 1.1 Last Updated 25/11/2014

Accounts Reconciliation Overview

Overview

Definition and Purpose

Importance
Policy
Requirements
Risk Assessment
Account population and Zero Balance Accounts
Process
Best Practices
Combined Reconciliations

Accounts Reconciliation Definition and Purpose

Accounts reconciliation is defined as the supported and documented explanation and
analysis of the ending balance of a general ledger account.
Balance sheet accounts should be reconciled on a periodic and timely basis in order to:

Verify that all items are accurate and reflect proper amounts
Ensure ending balances are correctly explained
Identify, document, track and explain transactional differences between the
General ledger and sub-ledger balances and/or independent sources
Identify and guard against fraudulent activity and reduce losses

Accounts Reconciliation Importance

Why is accounting reconciliation important for TIP?
This is because it:

Ensures transactions are reported timely and accurately on the General Ledger
Ensures that a proper explanation is provided for the ending balances
Provides a basis for meaningful analysis for management team & auditors
Reduces the risk of fraudulent activity and losses
Ensures integrity and completeness in financial records and reporting

Accounts Reconciliation Policy

A well supported and documented explanation and analysis of the ending balance of
the general ledger account is successful when:
1.
2.
3.
4.

Accounts are correctly classified into timing, required adjustment or listed

items
A robust description is provided for the account
Reconcilers are aware of the policies
Policy changes are timely communicated to the reviewers, preparers and all
involved in the account rec process

Accounts Reconciliation Policy

(cont.)

Item categories:
Listed: Balance properly recorded and supported in the account. Action is not
required to remove the balance from the account outside of normal business
processes (collection of customer receivable, payment of vendor invoices, sale of
inventory, etc.).
Required Adjustment: Certain items differ between the GL balance and the
supporting detail (such as a subledger or other analysis) and require adjustments to
the GL balance. These items generally relate to errors noted during the
reconciliation process.
A required adjustment item is considered aged if it has not been cleared in the quarter in
which the item was identified during the account reconciliation cycle. Cutoffs for clearing
required adjustment items are always on a quarter points. Aged required adjustment items
in subsequent reconciliations should be rejected by approvers as they cause an account to
fail the required adjustment item criterion.

Timing: Balance in the account not supported or known. Once an item is not
supported or known within the reconciliation deadline it should be marked as
timing and cannot be approved (also known as unreconciled) as it fails the
reconciliation criteria. After passing the deadline, the rec would become
delinquent and it will stay like this until the item is identified and properly
recorded.
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Accounts Reconciliation Policy

(cont.)

Transition from GE GBS tool to TIP Blackline:

Old GE GBS term

New TIP Blackline

term

Usage

Example

Recorded

Listed

For properly recorded line items,

where backup is available.

ELTO account tying to its

subledger.

Open

Required
adjustment

For line items that have to be

adjusted in the GL. Opening date of
item has to be completed and is
used to calculate aging of item.

Prepayment not released from

balance sheet in relevant
period.

Aged open

Required
adjustment

See above aging bucket is shown in

rec and rec should not be approved.
Item still needs to be adjusted in GL
and closing date needs to be
completed in rec.

When above prepayment is not

being corrected in GL during
quarter in which item is
recorded.

Unreconciled

Timing

To mark item as unknown or not

tying to backup upon rec cycle
deadline. Rec will become
delinquent and should not be
approved until backup is collected
and balance is fully understood by
preparer.

Third party backup requested,

but not delivered within 7 day
deadline. Backup can still be
uploaded into a delinquent rec
and the delinquent rec can then
be approved.

Accounts Reconciliation Requirements

Training: business should provide effective accounts reconciliation training to its
preparers and reviewers and be able to track the number of reconcilers who have
received this training

Controllership Quality Review: accounts reconciliations should be periodically audited

to ensure that all accounts are reconciled and reconciliation is in compliance with
specific criteria
Risk Stratification: Part of the reconciliation process is to define the risk status of the
accounts. Accounts can have different levels of risk (e.g. high or low). Risk
stratification affects the frequency of the reconciliation only. For example high risk
accounts are reconciled monthly. All other criteria are maintained regardless of risk
Audit Review: Reconciliations should be periodically audited by the Internal Auditor
and the local Controllership Staff

Risk Assessment
Accounts reconciliation should be performed at least quarterly depending on the risk
level of each account. For high risk accounts reconciliation should be performed in a
monthly basis.
The risk level of every new account is determined by the Group Controller and the
Chief Financial Officer (CFO). They review it and signed it off for all accounts at least
annually.
Account risk is determined based on business risk factors. These factors can vary and
include:
Risk of material misstatement involved
Complexity of accounting processes/systems
Volatility of account balance
Importance of reporting to external parties (banks, governmental agencies,
etc.)
Value of transaction volume
Extent that new processes/products affect the account

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Account Population and Zero Balance Accounts

All balance sheet accounts are required to be reconciled at account level, by legal
entity, in the functional currency.
Acquisitions are required to be included in the accounts reconciliation process no later
than the quarter subsequent to the acquisition date (e.g. second quarter for an
acquisition made in the first quarter).
According to TIP Trailer Services policy, zero balance accounts that have shown no
activity for six months may be reconciled automatically as part of the business
rationalization procedures.

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Accounts Reconciliation Process

Accounts reconciliation process consists of five steps:

Understanding an account
Understanding the steps to reconcile an account
Reviewing process
Measurement and status reporting
Filing of documentation

More specifically:

Understanding an account implies that a reconciler should have complete

knowledge and takes ownership of the account. Thus reconciler should know:
Entries affecting that account
Frequency of reconciling the account
The systems and person(s) posting entries in the account

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Accounts Reconciliation Process (cont.)

Understanding the steps to reconcile an account involves awareness of the major

steps involved in accounts reconciliation, why each step is important and how each
step is performed.

Reviewing process emphasizes the need for a review being an integral part, and the
value it brings to a reconciliation process.

Measurement and status reporting involves measurement of reconciliation by

following the eight key accounts reconciliation criteria, as defined by TIP Trailer
Services Policy.

Filing of documentation explains what to document while maintaining the accounts

reconciliation file for each account to be reconciled.

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Efficient Accounts Reconciliation

For an efficient accounts reconciliation the following information and practices are
essential:

Description & purpose of account

Description & purpose includes Chart of Account definition tailored for the
business specific use
The expected debit or credit balance and the range are documented, including
the rationale for exceptions

Open Issues tracking

Business utilizes dashboards for identifying items requiring adjustment, aging
of such items & delinquent reconciliations and conducts monthly/quarterly
reviews to discuss progress on clearing outstanding items & driving an action
plan

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Efficient Accounts Reconciliation

(cont.)

Account Population review

Process in place to ensure all balance sheet accounts are included in the
accounts reconciliation population
Accounts with no activity are reviewed to determine if they can be closed
Calculate accounts/preparer and accounts/reviewer ratios to identify and
address appropriate workload distribution

Periodic audits
Business performs periodic accounts reconciliation audits of itself
Business conducts an annual audit of those accounts reconciliations prepared
AND reviewed by contractors

Automation & Grouping functionalities

Assess if balances can be uploaded mechanically
Grouping of accounts reconciliations may be more meaningful and save time,
appropriate approvals are required

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Combined Reconciliations
Combined reconciliations are defined as:

Aggregating/grouping one or more related ledger accounts for reconciliation

purposes
Design of sub-ledger systems or processes makes reconciliation or review more
meaningful at higher levels

Accounts may be grouped as long as the grouping does not increase the risk of
misstatement of balances and the appropriate written approvals are obtained from
both the European Accounting Consolidation Manager and the TIP Controller

Note: In case we identify an unknown balance while we reconcile a group account, we

should remove the account with the unreconciled balance from the combined
reconciliation and report it separately. This is done for reporting purposes.

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Summary

Accounts reconciliation is defined as the supported and documented explanation

and analysis of the ending balance of a general ledger account
Accounts reconciliation audit issues can be minimized or avoided by having a strong
accounts reconciliation procedure in place.
Assessing the risk level of every new account being opened is the responsibility of
the business Controller and the CFO.
TIP accounts reconciliation Policy requires that zero balance accounts with no
activity for six months are reconciled automatically.
The accounts reconciliation process consists of the following five steps:

Understanding an account
Understanding the steps to reconcile an account
Reviewing process
Measurement and status reporting
Filing of documentation

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Accounts Reconciliation Criteria

Overview
Effective accounts reconciliation requires that eight specific corporate criteria are met
Accounting reconciliation criteria are a set of standard guidelines. They define the
requirements for an acceptable reconciliation and aim to make the reconciliation
process simple, more easily measurable, and more targeted towards risk

These criteria fall into two categories:

1) Immediate financial exposure
2) Sustainable Process Indicators/Longer Term Financial Exposure

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Eight accounts reconciliation criteria (1)

Account key information that should be documented include:

1. Description and Purpose of Balance Sheet Account

Account name, number and legal entity
Detailed account description and purpose, including details of account flows,
offset accounts, typical journal entries and estimated balance range
Detailed reconciliation procedure
Link to company policy
Currency of the account being reconciled
Risk category (high/low risk reconciliation on monthly/quarterly basis)
Balance sheet category (e.g. cash, other assets, accounts receivables etc.)

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Eight accounts reconciliation criteria (2)

2. Total of Identified Items Equals Ending Balance in the General Ledger
Account
The individual items that make up the total balance in the account reconciliation
should equal the general ledger ending balance. If they do not, then the account is not
properly reconciled. Additionally, the items need to be clearly identified and
described.
Accounts reconciliation fails criterion 2 when it has a roll-forward. A roll-forward is
where only the current period activity is explained and supported. Accounts
reconciliations should substantiate the entire balance, and not the current period
change.
Exception to the roll-forward rule:
Retained Earnings
Foreign Currency Translation Account (FCTA) Accounts
Example failing to pass criterion 2: Suppose we have an account for legal accruals.
If the balance identified on the reconciliation does not tie to the general ledger, it fails
passing criterion 2. Also, if the account appears to be a roll-forward, we cannot know if it is
one legal accrual or a sum of many.
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Eight accounts reconciliation criteria (3)

3. Items Supported by Sources Independent of the General Ledger Being
Reconciled
This criterion requires that the entire balance must be supported by sources
independent of the general ledger and not manual journal entries.

External resources:

Original Bank Statements

Investment/Trustee Statements
Deal Documents
Vendor invoice
Notices and penalties from regulatory agencies
Inter-company confirmations for DT/DF and affiliate current accounts

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Eight accounts reconciliation criteria (3) (cont.)

Sub-Ledgers:

Trade Receivables
Fixed Asset Ledgers
ET&L Subsystems
Accounts Payable
Mechanized Tax Calculations

Spreadsheets:
Reserve Analysis, Warranty, Bad Debt, Inventory, Litigation
Goodwill (Purchase Account Analysis)
Deferred Tax Analysis

Spreadsheets should show an analysis, not hard coded numbers and should reference
the source of the data and spreadsheet owner.
Note: If for an account only the purpose is mentioned while there is no independent
support documentation, then the account fails to pass criterion 3. Also, accounts with
balances that are calculated from other accounts cannot be considered reconciled, if
the related accounts are not approved.
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Eight accounts reconciliation criteria (4)

4. Accessible Documentation
Criterion 4 requires that the supporting backup documentation needs to be provided
within 48 hours (2 business days) after the request was received.
This criterion is important for both reconciliation preparation and review and aims to
reinforce the accumulation of supporting documentation during the reconciliation
process.

The ability to reproduce supporting documents for an account balance is critical for
the following reasons:
Prove the existence of independent backup
Demonstrate the validity of an account balance.
Provide the stakeholders, including Controller, CFO and Auditors with the right
information at the right time.
Note: All supporting documentation should be stored in the on-line rec tool where
available.
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Eight accounts reconciliation criteria (5)

5. Items requiring adjustment resolved in the Quarter Identified
Required adjustment items or timing items that need action are required to be closed
and cleared in the quarter identified.

Required adjustment items require further action to correct a journal entry to

another balance sheet account or to the profit and loss (e.g. wrong journal entry
and rounding). This action must be documented with an action plan, owner and a
due date
Required adjustment items are NOT items that properly belong in the account that
are awaiting disposition in future periods (e.g. uncollected sundry receivables).
If required adjustment items are not closed in the quarter identified, they are
considered aged. Aged items existing in an account balance result in a failure for
the account reconciliation.

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Eight accounts reconciliation criteria (5)

Item

Is balance
properly
supported?
N
Missing items
are marked as
timing and
become
delinquent
until solved

Is balance
properly
recorded

(cont.)

Listed Item

Account is
reconciled

Required
Adjustment
Item

Has the item

been resolved
within the
quarter
identified?

Is there any
valid action
plan?

Missing items
are marked as
timing and
become
delinquent
until solved

Required
Adjustment
Item

Account is
reconciled

Account
cannot be
approved and
is
unreconciled

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Eight accounts reconciliation criteria (5)

(cont.)

Items that belong to the account and are awaiting disposition in the future periods
on the normal course cannot be classified as items requiring adjustment or timing
item. Some examples of items that cannot be classified as item required
adjustment are listed below:

Checks issued, but not presented for payment.

Items/Balances that will self-correct within 30 days and are caused by cut-off
differences between businesses and/or systems.
Aged Accounts Receivables should not be classified as items requiring
adjustment; these are listed items.
Balances in salary payable account pertaining to those employees who have
left the company without information. The balances in the salary payable
account of the employees who left the company without notice to will not be
treated as an item requiring adjustment until the expiration date mentioned in
the relevant policy framed by the business to address such issues.

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Eight accounts reconciliation criteria (5)

(cont.)

Clearing items

The due dates to clear items is always in the quarter identified. The quarter identified
is defined as the quarter in which the reconciliation is performed.

For example an item requiring adjustment from a January reconciliation appearing in

the March balance would cause the March reconciliation to fail, as the item should
have been corrected as of March 31st. March is the first period for which this aged
item causes this account to becoming a timing item during reconciliation and cannot
be approved anymore until the item is resolved.
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Eight accounts reconciliation criteria (6)

6. Account Reconciliation Review by Peer/Manager and Indicated by
Signature and Date
Reviewers should be senior in level to the reconciler, or a peer in cases where finance
personnel is limited, or even contractors.
In such case the contractor is the reviewer, additional procedures and controls should be
used including:
Assigning review responsibilities only to senior-level contractors
Assigning only basic account reconciliations to contractors for review
Periodic audits of account reconciliations reviewed by contractors
Signature indicates that the reviewer:
Understands the reconciliation criteria.
Possesses knowledge of which items should be included and excluded in the account.
Agrees with the reconciler's conclusion and action plan, if any.

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Eight accounts reconciliation criteria (7)

7. Accounts Reconciliation is Completed Timely
TIP Reconciliation Policy requires all account reconciliations to be completed and
reviewed within 11 working days following the last working day of a period. Per
Accounting Month End (AME) calendar this means that employees have 7 working days
to reconcile their accounts following the final upload into the reconciliation system.
However more rigorous deadlines can be set by the business in order to comply with
the Corporate requirements on a timely basis.

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Eight accounts reconciliation criteria (8)

8. Cash accounts have Treasury Code Referenced
All cash accounts are required to have an assigned bank account Treasury Code
generated by TIP Treasury.
This criterion applies to cash accounts of recently acquired businesses no later than
the quarter subsequent to the acquisition date.
Required documentation (as available within Treasury) includes:
Bank database to validate treasury code
Bank statements/confirmation: electronic statements to validate account number
Bank information
Bank contact

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Eight accounts reconciliation criteria-Documentation

Account

Accounts Receivable (A/R) and Accounts Payable (A/P)

Source Documentation Examples

Original bank statements
Outstanding check lists
Trial balance sub-ledger report

Intercompany Due From/ Due To

Confirmation rom other business required

Inventory

Physical inventory reports

Roll-forward analysis from date of last physical
count

ELTO & Fixed Assets

Sub-ledger system report

Investments

Investment statement/confirmation
Impairment analysis
Cross business schedule
Purchase accounting analysis
Deal documentation

Prepayments

Vendor invoices

Reserves and Accruals

Reserve analysis

Borrowings

Taxes

Loan agreement
Amortization schedule
Bank statement
Purchase accounting analysis
Parent investment account
Tax calculations and returns

Current Accounts

Required written confirmation from other business

Cash

Goodwill/Intangibles

Capital and Equity

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Eight accounts reconciliation criteriaDocumentation

(cont.)

Unacceptable Support documentation

Copy of journal entries made in GL
Email request giving journal entry details with no supporting analysis
Management reporting tool query (except when used for analysis, such as reserves)
Other GL query

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Eight accounts reconciliation criteria

The eight accounts reconciliation criteria fall into the following two categories:
1. Immediate Financial Exposure
2. Sustainable Process Indicators/Longer Term Financial Exposure
See below how the 8 accounts reconciliation criteria are classified under the two
categories:
1. Immediate Financial Exposure

Total of identified items equals ending balance in the general ledger account (Criterion 2)
Items being reconciled are supported by sources independent of the general ledger (Criterion 3)
Items requiring adjustment resolved in quarter identified (Criterion 5)
Accounts reconciliation documentation of cash accounts indicate Treasury Code (Criterion 8)

2. Sustainable Process Indicators/Longer Term Financial Exposure

Description and purpose of account documented (Criterion 1)

Documentation accessible (Criterion 4)
Reviewer assessment conducted (Criterion 6)
Reconciliation completed timely (Criterion 7)

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Properly Reconciled Accounts Characteristics

Key account information is documented

Sum of the listed items equals the sum in the general ledger
Items are supported by sources independent of the general ledger
Accounts reconciliation and supporting documentation is accessible
No aged items from prior quarters
accounts reconciliation reviewed and signed with electronic signature
Reconciliation completed and reviewed timely
Treasury Code indicated if cash account

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Accounts Reconciliation Errors

Accounts reconciliation errors occur when an account fails to meet any of the eight key
accounts reconciliation criteria.
In this case the account cannot get approved and becomes delinquent after the end of
the cycle.
Some of the common errors in accounts reconciliation are listed below:

Description of account not clear for external parties to understand

Reconciler does not fully understand the purpose of the account
Supporting details and/or reference to hardcopy data are missing
Journal entries used to support account balances
Action plan for required adjustment items not clear (wrong due date/insufficient
detail)
Wrong usage of required adjustment" vs. listed" classification
Difference between General Ledger and supporting detail (rounding differences,
etc.)
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Summary

Accounts reconciliation criteria are a set of standard guidelines that define the
requirement for an acceptable reconciliation

An accounts reconciliation that fails to meet any of the eight criteria below should
be called unreconciled:
Criterion 1 requires key account information to be present in the accounts
reconciliation
Criterion 2 requires that the sum of the items listed on the accounts
reconciliation equal the ending balance in the general ledger
Criterion 3 requires that the entire balance must be supported by sources
independent of the general ledger
Criterion 4 states that if requested, an account and the supporting backup
documentation needs to be provided within 48 hours
Criterion 5 states that identified items requiring adjustment or items that
need action are required to be closed and cleared in the quarter identified
Criterion 6 requires accounts reconciliations to be reviewed by a peer or
manager
Criterion 7 states that accounts reconciliations must be completed on time
Criterion 8 requires the Treasury Code to be indicated in the accounts
reconciliation documentation for all cash accounts
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END