finance training final

Koneksie Finance Training

June 2016

INDEX

PART 1- INVENTORY

PART 2 – REVENUE RECOGNITION

PART 3 - PERIODIC CLOSE

TOPICS – PART 1

INVENTORY•Definitions•Presumed title transfer•BoM: inventory vs expense•Costing method•Full Absorption Costing•Transfer pricing; apply, do not charge•Interco booking @ Kibo•Labor costing: wip and fgi•Plant overhead•Procurement overhead•FGI to COGS•Overview of costing, flow, process•Periodic stock count, valuation, and adjustment•Inventory Journal Entries

Inventory Definitions

• Assets which (1) are held for sale in the ordinary course of business (2) are in the process of production for such sale, or (3) in the form of materials or supplies to be consumed in the production process or in the rendering of services

Inventory• Costs of Good Sold. Under a full absorption costing method this would

include direct materials, direct labor, production overhead, and procurement overhead costs. COGS

• Raw materials inventory. Materials that are in stock that have not been put into any conversion process. Essentially, raw materials are available on stock as delivered by the vendor.Raw

• Work In Process. Materials that have been issued or kitted from stores or the warehouse, and are in process in the production area. Materials in WIP may lie in various stages of completion.WIP

• Finished Goods Inventory. Units that are completed and available for sale or other disposition. FGI

• A part number (often abbreviated PN, P/N, part no., or part #) is an identifier of a particular part design used in a particular industry. Its purpose is to simplify reference to that part. A part number unambiguously identifies a part design within a single corporation, and sometimes across several corporations.

P/N

Inventory Definitions, continued

• Bill of Materials: a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, parts and the quantities of each needed to manufacture an end product.BoM

• Direct Material Cost file. A spreadsheet created containing non-fastener part numbers on the BoM with procurement unit prices and qty per indicated. Extending the unit prices and qty per provides an estimated standard cost for the BoM excluding fasteners.

DMC File• Abbreviation for Quantity. Identifies the quantity of a sub-component

required to manufacture the end product.Qty• Performance against standard.

• i.e. job standard is 1.0 hours, actual work of 1.0 hour is 100% efficiency• if the job is 90% done in an hour, the efficiency is 90%• 2 standard hours @ 90% efficiency takes 2 / 90% = 2.22 hours

Efficiency• Actual productive time versus available time

• Working 8 hours in an 8 shift = 100%• Working 6.5 hours in an 8 hour shift [breaks, training other] = 6.5 / 8.0

= 81.25%Productivity

• Efficiency x Productivity = Utilization• Efficiency = 90%, a 1 hour job takes 1.11 Hours• Productivity = 90%; of an 8 hour shift Direct Labor is available 7.2

hours• Utilization = 90% x 90% = 81%• An 1 hour job takes 1 / 81% = 1.2345 hours

Utilization

Inventory Definitions, continued

• Hours per Unit. The standard number of hours to manufacture a product.

• HPU is the standard at 100% efficiency / productivity / utilization. • At the time of writing of this policy, there are not technical/industrial

time studies done for the assembly of the motor vehicles, and 12 hours per unit is deemed to be an accurate estimation.

HPU

• Equivalent Units. An equivalent unit of production is an indication of the amount of work done by manufacturers who have partially completed units on hand at the end of an accounting period.

• Fully completed units and the partially completed units are expressed in terms of fully completed units. i.e. % of completion.

EU

• Intercompany. Transactions between related parties within the Group. Interco

FOB• Free On Board. Indicating "FOB port" means that the seller pays for

transportation of the goods to the port of shipment, plus loading costs. • The passing of risks occurs when the goods are loaded on board at the

port of shipment.

Inventory Title transfer, control, risk

FOB with suppliers is supplier location

Consolidated shipments, FOB = closed

container [locally]

Transfer of title, control, & risk

Kibo has access to a “case by case” insurance

policy

Simultaneous transfer to Kibo

Goods in Transit = Kibo title

Inventory BoM: Inventory vs. Expense

• Assets which (1) are held for sale in the ordinary course of business (2) are in the process of production for such sale, or (3) in the form of materials or supplies to be consumed in the production process or in the rendering of services

Definition

• Cost/benefit of inventory control• Material Requirements Planning [MRP] management?• Flow through the operations

In Practice

• Low value, small in size• Fast moving, shorter lead times• Min/Max or safety stock procurement management• Treat as Expense [charge Plant cost center]

Fasteners

• body parts, brakes, electric parts, engine, exhaust, frame, front fork, front wheel, handle bars, lighting, rear wheel, and swing arms

• BoM and production scheduling drive purchase requirements• Treat as Inventory

All other part groups

What is inventory?

Inventory Costing Method: Standard, Weighted Avg Act, or…?

Topic Dynamics Effecting Cost per Unit Current Policy Costing Method

Direct Materials • Stabilization/finalization of BoM, minimizing obsolescence and optimizing lead times

• Price changes based on volume leverage, sourcing, and negotiations

Standard cost from DMC file estimate of $1608.02 will be used for EU and COGS units.

Direct Labor • Reduced rework• New hiring and training stabilizes which minimizes

learning curve effects• Effective direct labor per unit reduction, since production

assembly staff are effectively paid on a fixed monthly salary basis

• Continuous improvement, Lean, Six Sigma implementation

Actual costs: Total variable direct labor costs per hour will be used on WIP and FGI EU.

Production Overhead

• Reduced overhead per unit based on increased volume throughput

Actual overhead costs based on standard theoretical capacity.

Procurement Overhead

• Sourcing• Reduced frequency of expedited orders

Actual costs: Procurement cost center as % of inventory received, applied to ending material inventory value.

Inventory Full Absorption Costing

Concept Explanations

What is Full Absorption Costing?

• All of the manufacturing costs are absorbed by the units produced • cost of a finished unit in inventory includes direct materials, direct labor• variable and fixed manufacturing overhead• COGS reflects all direct and indirect costs of production

Direct vs. Indirect

• Direct• Identifiable to products or services• The process included in the HPU

• Indirect• Not specifically identifiable to an end-unit/FGI• Administrative, supervision, management

Production Overhead

• Plant cost center• Indirect employee costs, depreciation, facilities, supplies, etc…

Procurement Overhead

• Transport• Duties/import fees that are not-reclaimable• Typically procurement, warehouse, handling staff

Applying Full Absorption Costing

• Production Overhead per unit• Theoretical capacity basis [10 units / week / 50 weeks per year]

• Procurement overhead• Procurement overhead % [procurement CC / inventory purchases]• Applied to ending gross materials /inventory value

Inventory Interco and proper cost objectives

Concept Explanations

IntraGroup is not “trade”

• Interco transactions should not be presented as part of trade creditors or debtors

• Separate as intercompany• Facilitate intercompany consolidation [elimination]• Proper consolidation to external parties [assets, liabilities, ratios]

Manual work flows

• PO administration• Invoice administration [transport/commercial and interco]

Identification • Excel administration• Important to identify and align on proper cost objectives

• international transport costs, tools as expense, capitalized tooling for production, product development, GASS, spare parts

Inventory EU in WIP and FGI, Direct Labor Costing

Concept Explanation

Proper presentation of Raw, WIP, FGI

• Present inventory status in ledgers and management reporting• Control, accountability

• Observation of status at period close• Materials vs. labor vs. % of completion of units

Full Absorption Costing

• Direct labor and overhead as part of inventory valuation • Direct labor: total variable cost per hour

• Gross wages, medical, social security, lunch, unused vacation days

Revenue & Expense recognition

• Full absorption model also results in concurrent recognition• Revenues, COGS

Other • Cumulative YTD basis, for units on hand in inventory• Not the same as “units produced”

Example • Beg EU FGI: 20• Units produced 30• Units sold 40• End EU FGI: ? • What’s the number of units for the WIP/FGI labor & overhead analysis? 10

Inventory EU in WIP and FGI, Direct Labor Costing [the model]

a b c d e f g f + g

a x b c x d c x e

DMC File/Standard Cost

63 total units issued to product @ $1608,02

Inventory Overview – inventory account movements

Account type Increments Decrements

Goods in transit Based on Interco invoices from Koneksie BV, when goods are shipped from Vendors and have not yet arrived in Kenya.

Goods are received and transferred to Raw Materials.

Raw / parts in stock

Interco invoices for shipments received by Kibo.

Period ending WIP/FGI analysis, based on % of completion and EU’s, and applying Standard cost BoM.

WIP Period ending WIP/FGI analysis, based on % of completion and EU’s, and applying Standard cost BoM.

Changes in WIP/FGI balance from period ending analysis based on EU.

FGI Period ending WIP/FGI analysis, based on % of completion and EU’s, and applying Standard cost BoM.Also, any purchased/transferred completed units from outside Kibo.

Recognition of sold units, @ standard cost of direct material file.

Inventory Periodic GL Inventory Adjustment to Stock Count

Steps Comments

Suggested timings

• Minimum 1x / year, with auditor observation• Aligned to significant period result reportings/presentations• Inherent risks or weaknesses in inventory control & process

1. Stock count • Qty of Part numbers of inventory parts [not fasteners]• Unless there are specific provisions/reserves, obsolete/cancelled

part numbers should not be included

2. Apply Unit Prices

• USD Unit prices [latest PURCHASE cost-prices, not future/new contracts]• Historical cost perspective

3. Weighted AVG FX [Eur/USD]

• Based on timing, amount, and effective purchases reflected in ending inventory [not of Exact, OANDA, or other]

4. Post Adjustment

• Compare the valuation from steps 1-3 to the Exact GL balance and adjust accordingly using

Inventory Periodic GL Inventory Adjustment – Weighted AVG FX Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Total

Exact FX 1,17900 1,12250 1,07290 1,11880 1,09710 1,11610 1,09780 1,11810 1,12432 1,03370 1,01650 1,04884 Purchases $1.000.000 $100.000 $1.100.000

Weighting % 91% 9% 100%

Weighted FX 1,07182 - - - - - - - - - - 0,09535 1,16717

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 1.01000000

1.03000000

1.05000000

1.07000000

1.09000000

1.11000000

1.13000000

1.15000000

1.17000000

1.19000000

Exact FXExact Avg FX [YR]Weighted FX

Inventory Sample Journal Entries [KIBO]Description Month 1 Month 2

Beginning FGI 0 5

Produced 10 15

Sold 5 10

Ending FGI 5 10

List Price KES 295.000 KES 295.000

Standard BoM KES 160.800 KES 160.800

HPU 12 10,8

DL / hour KES 216 KES 216

Plant Ovhd / unit KES 38.036 KES 38.036

Procure % 49,38% 40,00%

Plant CC Runrate [Indirect Costs] KES 1.834.528 KES 1.834.528

Inventory:

Kits Procured 60 10

Inventory Procured KES 9.648.000 KES 1.608.000

Raw KES 8.040.000 KES 7.236.000

WIP KES 0 KES 0

FGI KES 804.000 KES 1.608.000

Total KES 8.844.000 KES 8.844.000

P&L

Revenue KES 1.475.000 KES 2.950.000

COGS:

* Materials -804.000 -1.608.000

* Plant -1.834.528 -1.834.528

* Procurement -4.764.447 -643.200

Plant Reversal - 203.166

Procurement Reversal - 4.367.410

New Plant overhead Adjustment -203.166 -403.735

New Procurement overhead Adjustment -4.367.410 -3.537.600

Gross Profit -10.498.551 -506.487

Gross Margin -711,8% -17,2%

Cost / Unit KES 2.394.710 KES 345.649

B/S

Materials:

Raw KES 8.040.000 KES 7.236.000

WIP KES 0 KES 0

FGI KES 804.000 KES 1.608.000

Labor & Overhead KES 203.166 KES 403.735

Procurement Overhead KES 4.367.410 KES 3.537.600

Total KES 13.414.576 KES 12.785.335

Month 1 Debit Credit Month 2 Debit Credit

1. Inventory Procured from Koneksie BV 1. Inventory Procured from Koneksie BV

60 kits @ Standard BoM 10 kits @ Standard BoM

30000 Parts in stock KES 9.648.000 30000 Parts in stock KES 1.608.000

Interco Pay to Koneksie BV KES 9.648.000 Interco Pay to Koneksie BV KES 1.608.000

2. Inventory movement to FGI 2. Inventory movement to FGI

10 for units produced @ Standard BoM 15 for units produced @ Standard BoM

30200 FGI KES 1.608.000 30200 FGI KES 2.412.000

30000 Parts in stock KES 1.608.000 30000 Parts in stock KES 2.412.000

3. Units Sold 5 @ List Price 3. Units Sold 10 @ List Price

80009 Revenue KES 1.475.000 80009 Revenue KES 2.950.000

13000 Trade AR [or 16700 Prepayments] KES 1.475.000 13000 Trade AR [or 16700 Prepayments] KES 2.950.000

47XXX COGS KES 804.000 47XXX COGS KES 1.608.000

30200 FGI KES 804.000 30200 FGI KES 1.608.000

4. Ongoing Plant Cost Center Costs 4. Ongoing Plant Cost Center Costs

4XXXX Various KES 1.834.528 4XXXX Various KES 1.834.528

16XXX or 17XXX KES 1.834.528 16XXX or 17XXX KES 1.834.528

5. Apply Labor and Overhead to FGI 5a. Reverse Month 1 Labor and Overhead

5 Units @12 HPU @ KES/HR and Ovhd/unit

30250 Production Overhead Applied KES 203.166 30250 Production Overhead Applied KES 203.166

49500 Production Overhead Adjustment KES 203.166 49500 Production Overhead Adjustment KES 203.166

5. Apply Labor and Overhead to FGI

10 Units @10,8 HPU @ KES/HR and Ovhd/unit

30250Production Overhead Applied KES 403.735

49500Production Overhead Adjustment KES 403.735

6. Monthly Procurement Cost Center Costs 6. Monthly Procurement Cost Center Costs

4XXXX Various KES 4.764.447 4XXXX Various KES 643.200

17XXX KES 4.764.447 17XXX KES 643.200

7. Apply Procurement Overhead to Inventory Balance 7a. Reverse Month1 Procurement Overhead

30260 Procurement Overhead Applied KES 4.367.410 30260 Procurement Overhead Applied KES 4.367.410

49600 Procurement Overhead Adjustment KES 4.367.410 49600 Procurement Overhead Adjustment KES 4.367.410

7. Apply Procurement Overhead to Inventory Balance

30260Procurement Overhead Applied KES 3.537.600

49600 Procurement Overhead Adjustment KES 3.537.600

Inventory Sample Journal Entries [KIBO]

See Excel Comprehensive Example

Inventory Cost Structure and Overhead Pools

TOPICS – PART 2

REVENUE RECOGNITION•Definitions•Revenue or Cost?•The Sales Menu•GL Dimensions•Gross vs. Net revenues•Vehicles: additional charges•Vehicle payment/sales process•After Sales: Repair vs. Maintenance•Service contracts•Standard warranty•Multiple elements•Franchise Revenue Streams•Intercompany elimination

Revenue Recognition Definitions

• Revenue arises in the course of an entity’s ordinary activities. It is referred to by a variety of terms including sales, fees, interest, dividends, royalties and storage.

• Koneksie Group records revenues using the Group international chart of accounts as net revenue. (net price after discounts from sales deals)

Revenue

• In addition, revenue from the sale of goods is recognised when:• the entity has transferred to the buyer the significant risks

and rewards of ownership of goods; and • the entity retains neither continuing managerial involvement

nor effective control over the goods sold.

Sale of Goods

• The amount by which the Standard sales price has been adjusted. Discount

• Terms and Conditions for sale of KIBO motorcylesT’s & C’s

Revenue Recognition Definitions

• Two or more transactions need to be grouped together if they are linked in a way that the whole commercial effect cannot be understood without reference to the series of transactions as a whole.

• i.e. combine vehicle sales with service and accessories, potentially as “bundled sale” with a total discount applied.

Multiple Element Arrangements

• Royalties are recognised on an accruals basis in accordance with the substance of the relevant agreement.Royalties

• Business model of organizations or companies selling direct to other organizations or companies. Abbreviation for “Business to Business”

B2B

• Business model of organizations or companies selling direct to consumers. Abbreviation for “Business to Consumer”.B2C

Revenue Recognition Revenue or Cost / the Sales Menu

Should a transaction be Revenue or cost offset? Company Sales Menu

KFC • Various types of chicken• Drinks• Side dishes• Menu’s

KA • Provides procurement services to BV• Intercompany

KO • Provides strategic direction and access to IP of design of motorcycles• Controls the Franchise strategy model. • Sells materials to Kibo which may be at a higher transfer price than acquired

from KA, and sells franchise products and services.

Kibo • Assembles and sells vehicles• Provides after sales services, training, gear and accessories• No “upstream” intercompany sales expected

Revenue Recognition Dimensions

• GL account• Type: Vehicles, GASS, After Sales,

Training, Services, Franchise, Interco• Cost Center• Cost Unit

Current

• Country• Model• Configuration• GASS specifics• Business models [B2B, B2C]• Sales channels [direct, indirect,

franchise*]

Future Potential

Revenue Recognition Gross vs Net Revenues, Additional Charges

Gross / List Price Discounts Net Price

Vehicle Revenue

MotorcyclesFX rate changes

StorageDeliverySales taxesDuties

Interest

• Revenues are recognized at Net • Vehicles revenues include additional charges

Revenue Recognition When is Revenue recognized?

the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an entity• Sales Menu

such as sales of goods, sales of services, interest, and royalties

it is probable that any future economic benefit associated with the item of revenue will flow to the entity• Payment in advance• Credit standing of B2B customers

the amount of revenue can be measured with reliability• List price• Agreed “deal”• Invoice

Revenue


Rendering of Services

amount of revenue can be

measured reliably

probable that the economic

benefits will flow to the seller

stage of completion at the balance

sheet date can be measured reliably

costs incurred, or to be incurred, in respect of the

transaction can be measured reliably

Sales of Goods

Seller transfer to buyer risks and

rewards of ownership

Seller has no managerial

involvement nor effective control

amount of revenue can be

measured reliably

probable that the economic benefits associated with the

transaction will flow to the sellercosts incurred or to

be incurred in respect of the transaction can be measured reliably


Payment

• In advance, and cleared

Actual risks

• Not to buyer until delivery

Kibo responsibility

• Maintains until delivery

Vehicle delivery

• Sale of goods completed

• Revenue can be recognized

• COGS recognition

Per 2015 Kibo T’s and C’sSections 4.7, 5.2, and 5.3

Revenue Recognition After Sales: Repair or Maintenance?

The After Sales Revenue category includes the following: Repair services, Maintenance services, Service contracts, Spare partsRevenue accounting is driven by conditions of After Sales being Contract or non-contract

Maintenance•Routine, perhaps scheduled•Oil/fluids•Tire pressure check•Brakes pads/discs/system•Chain•Tires•Lubrication•Filters•Battery•In the process of maintance, you may find items needing repair or replacement

Repair•Is it broken?•Malfunction•Replacement•Can the vehicle safely be operated?•Warranty vs out-of-warranty

Revenue Recognition Service Contracts

Included in sales price

Future obligation

• Recognize in the future

Defer Revenue

Not Standard Warranty. These are service agreements to conduct maintenance, and potentially include repairs

Assign revenue• Based on relative

list prices or Benchmark study

Balance sheet provision• Part of current

liabilities

Recognize• Over time or

activity-based• Costs recognized

as incurred

Revenue Recognition Standard Warranty

What is Warranty?

• Promise that the product complies with the specifications in the contract• Materials free from defect• Workmanship

• Properly constructed of proper materials

• the customer does not have the option to purchase a warranty from the entity separately

• Recognize revenue and concurrently accrue any expected warranty cost when the product is sold.

• Revenue from separately priced extended warranty contracts is deferred and recognized over the expected life of the contract.

GL Accounts Non-current / recall liability Non-current expense

Standard product liability [current liability]% of revenue or COGS?

Standard product expense

07080 44225

19500

44220

Revenue Recognition Multiple Elements

• Discounted by 10%

Vehicle Intro price

295k KES

• 10% of bikes will require 5k of materials

Standard Warranty

• Available for Sale @ 10k

1 year Service

Contract

• Helmet list price: 2k

• Boots list price: 3k

Helmet and boots included

• Fair value 1kRider

Training course

Sample DealSales Price 90% KES 265.500

Description List Price % of Total AllocationVehicle KES 295.000 94,9% KES 251.841Standard Warranty - KES 01 Year service contract KES 10.000 3,2% KES 8.537Helmet KES 2.000 0,6% KES 1.707Boots KES 3.000 1,0% KES 2.561Rider Training KES 1.000 0,3% KES 854Total KES 311.000 KES 265.500

G/L Description GL Account Debit CreditVehicle Revenue 80009 KES 251.841Standard Warranty Expense 44220 KES 500Standard Warranty Liability 16600 KES 500Deferred Service Contracts 16250 KES 8.537Revenue GASS Helmets 80080 KES 1.707Revenue GASS Boots 80095 KES 2.561Training Revenue 80130 KES 854Trade AR 13000 KES 265.500

Totals KES 266.000 KES 266.000Deferred Service Contracts 16250 KES 711Revenue - Service Contracts [1/12]

80120KES 711

* Monthly Amortization

Standard Warranty Liability KES 495Inventory KES 495* Actual warranty claim, materials used

Totals KES 1.206 KES 1.206

Revenue Recognition Franchise Models

License

Rights to particular market

Usually covers several years

Payment upfront = deferred revenue

recognized over the contract period

Accounts:•Unamortized Licenses:

07060•AR: 13050•Uncollectible accounts:

13150•Revenue: 80155

Equipment Sales

“Koneksie” approved production equipment

Where will franchisees get the equipment? •This revenue stream in

case Koneksie sells to Frachisees

Accounts:•Prepaid Equipment for

Sale: 30910•Equipment for Sale:

30500•Equipment Revenue:

80160•Equipment COGS: 47160

Parts/Inventory

Sales

Will franchisees buy “start-up” inventory

from Koneksie?

Will Franchisees buy directly from Suppliers

or via Koneksie?

Accounts: • Inventory: 30450•Revenue: 80165•COGS: 47165

Royalties

Ongoing % of franchisee revenues

Accounts:•Revenue: 80170•COGS: 47170 (potentially

none)

The Franchise “Sales Menu” is unique compared to the 3 other Group companies

Revenue Recognition Intercompany Elimination

Description KA KO Kibo

Cost Plus Mark-up % on Operating Expense

80180 Revenue Interco Services

* Leaves a small taxable residual in Asia

47180 COGS Interco Services

Royalties [IP] 80190 Interco Royalty Revenue

47190 Interco COGS Royalty

Head Office Charge

80195 Interco Head office Charge

47195 Interco COGS Head Office Charge

Part Sales w/ Mark-up

80175 Interco Part Sales

47175 Interco COGS Part Sales

Interco Profit Kibo’s inventory will include the interco mark-up, which needs to be eliminated. Use the mark-up% and inventory value to determine the amount of interco gross profit to eliminate in Consolidation.

TOPICS – PART 3

PERIODIC CLOSES•Definitions•Accounting basis: IFRS, DAS, HK? •Close days•Check lists•Status on chart of accounts•Cost structure•Staff costs•Expense recognition: Bonus/variable, vacation days, employer wage costs•Rent•Insurance•Deposits for property leases•Prepaid expenses•Prepayments to vendors for tooling•Prepayments to vendors for inventory materials•Marketing expenses•Allowances: bad debts, warranty, inventory•Exact close procedures•Quality Control•Management package overview

Periodic Closes Definitions

• Costs of Goods Sold. This includes the prime costs – direct materials and direct labor – and related overhead for Plant and Procurement cost centers. These are specifically production costs related to the manufacture of goods to be sold.

COGS

• Chart of AccountsCoA

• Koneksie AsiaKA

• Koneksie BV in the NetherlandsKO• Journal Entry. A procedure at the general ledger of the financial

system represented in debits and corresponding credits that net to zero.

JE

• Dutch Accounting StandardsDAS

• International Financial Reporting StandardsIFRS

Periodic Closes Accounting Standards

KA KO Kibo

Standard • HKFRS• Converged with IFRS

• Dutch Accounting Standards [DAS] for small companies• Minimal presentation

required• IFRS applicable for large and

publicly traded companies

• IFRS• IFRS for SME’s

Notable Comparisons

• Chart of Accounts• Revenue / Costs

placement• Mostly alike for Revenue• LIFO inventory not allowed

by IFRS

Group Policy • Potential investors will not be just Dutch, not just Kenya• IFRS:• Chart of accounts structure• Leads to financial reporting structure

• Mapping for Statutory Accounts 1x per year• General features: Fair presentation, Going Concern, Accrual basis, Materiality and

aggregation, Offsetting [forbidden], Comparability, Consistency• Qualitative characteristics: Relevance, Faithful presentation, Verifiability, Timeliness,

Understandability• Recognition of Elements in the financial statement

Periodic Closes Close Days

-5

-4

-3

-2

-1

Periods• Fiscal months & years• Prior months to be closed once

completed• Only current month opened?• Prior years closed once Statutory

Accounts completed

Close Days• Reference last and first business

days in the month• + and - concerning the

current/close month• Close doesn’t not always start on

the same day

+1

+2

+3

+4

+5

-5

-4

-3

-2

-1

+1

+2

+3

+4

+5

-1

-2

Periodic Closes Check Lists

Close May 2016

Company Topic Action Who When Done Approved Follow upBV Salary journal Make Salary journal RW -7 xBV On charge Gotektsi for DvS TH RW -7 xBV Cash USD Book them RW -5 xBV Cash CNY Book them RW -5 xBV Cash TWD Book them RW -5 xBV Cash HKD Book them RW -5 xBV Cash DKK Book them RW -5 xBV ABN Amro Euro Book them RW 1 xBV ABN Amro Euro Book them RW 1 xBV ABN Amro USD Book them RW 1 xBV Cash EUR Book them RW 1 xBV Niet toegewezen bank 23000 Must run on "0" RW 1 x Input Huib/thami/PaulineBV Salary journal Make Bonnus journal RW 1 xBV Make vacation payment journal RW 1 xBV Intangible assets Book the investments from the period to the specifications RW 1 x Input from PieterBV Adjust depreciation for period in speccifications RW 1 xBV Book depreciation for period in Exact Online RW 1 xBV Check general ledger with Specification RW 1 xBV Tangible assets Book the investments from the period to the specifications RW 1 x Discuss tooling with Pieter

Common Format• Excel• Filter & Sort

All items• JE’s• Reports• Exact tasks, etc

Focus• Completed• Challenges

Timing• Chronological flow best• When is in “close days”

Perpetual updates

Periodic Closes Chart of Accounts, Status

•Attempt to maintain current groupings

•All 3 companies•Done in week 23 / 2016

•Maintain GL Account transactional history

•Fully implement with new ERP

•IFRS structure•Balance sheet liquidity•Revenue at top of P&L

•Flexibility•Future business models•Single language•Element/type•322 accounts•30 Revenue accounts New 6-

Character IFRS

Version

Current Version Mapped

Gaps added

Uploaded to Exact

Periodic Closes Cost Structure

Plant• Activites

related to production / assembly of vehicles

• Mfg Ovhd CC

Procurement• Supply chain

• Transport

• Duties• Overhea

d CC• Material

s Management?

R&D / Product

DevelopmentSales

• Vehicles• Profit

Center

After Sales

• Services• Profit

Center

GASS

• Profit Center

Training

• Profit Center

M&A

• Management

• Finance

Cost Center FocusOverhead pools• What does it cost to

make a unit?• Production / Assembly• Materials

Management

Accountability• Financial

responsibility

Revenue / Profit Center Management• Gross Profit at Product

category

Periodic Closes Staff Costs – Guiding Principles

Reflect Local Labor Laws•What happens when an employee leaves?•Vacation days carryover / balances•Bonus payments•Additional months

Local Company Policy•Vacation days carryover / balances•Bonus Payments

Payroll at Gross•Actual costs to Koneksie Group•Employee taxes are withheld and remitted

•So far, KO and Kibo employees are “monthly salaried” and paid before month end•Month end wage accruals not necessary•NL holiday pay paid each month

Use of proper GL accounts•Employee•Casual Labor• Interim / Temporary•Agency•Management fee•Payroll added costs•Employer wage tax/social costs/Benefits

Cost Center Focus Applied

Timing / Recognition•Accruals - •When earned, not when paid•Vacation days•Bonus•Sales Quotas•Management Objectives•Productivity

Minimize “Trend Blips”

Periodic Closes Other Items Affected by Accruals & Recognition• Period prepayments

• Carry on the balance sheet• Free rent periods

• Amortize net total payments over entire lease period

Rent

• Match premiums to coverage periods• When no invoice, accrual estimatesInsurance

• Carry on balance sheet• Charge to Expense as Landlord applies to rentDeposits for Leases

• Recognize over appropriate periods• Ongoing review• T’s & C’s [rights to return/adjust]

Prepaid Expenses

• Often paid in phases• Trigger for capitalized & depreciate:

• When Tooling is completed

Prepayments to vendors: Tooling

• Vendor invoices booked effectively at net• No liability once prepayment is paid

• Are current assets• Transfer to inventory when vendor “Sale of Goods” per FOB terms are

met

Prepayments to vendors: Inventory

• Fixed amount for current period• Actual costs for past periods• Potential for accruals

Subscriptions / mixed contracts

• Deadlines and Products can be different than Supplier Invoicing timing• Watch T’s and C’s of projectsMarketing Expenses

Periodic Closes Allowances and Write-offs

Bad Debts• Provision for AR that becomes

uncollectible• Establish Allowances:

• DR 45600 CC ?• CR 13100 / 13150 Franchise

• Write-offs• DR 13100 / 13150• CR 1300 / 13050 Franchise• VAT Payable?

Warranty• Provision of costs to meet

warranty obligations• Establish Allowances:

• Short-term / Recall• DR 44220 / 44225• CR 16600 / 07080

• Write-offs• DR 16600 / 07080• CR 30000 / 30460

Inventory• Provision for

obsolete/excess/impaired stock

• Establish Allowances• DR 47220• CR 30700

• Write-offs• DR 30700• CR 30000

Historical / Expected %

Establish allowances• Asset

valuation• During the

Close

Write-offs• Against

allowancesUpdate

Historical %’s

Repeat

Periodic Closes Exact Close Procedures: Process and Revaluation

1. Process all entries

2. Set journal type to “90”3. Set financial year4. Select “to be processed” entries

5. “Process”


6. Update FX RATESOANDA +4% [2015]Avg, KCB / Oanda 0% [2016]


7. Revaluation

8. Select currencies9. Select journal type “90”10. “Process”

Periodic Closes Exact Close Procedures: Others

Year End Close

Menu selection

Process the Final P&L• Roll results to Retained

Earnings

G/L Account Upload

Menu selection

File layout

Mandatory fields

Field criteria and selections

Procedures & Graphics in Close Policy and Appendices

Periodic Closes Quality Control

Quality Financial Reporting

Policies & Procedures•Standards•Accounting treatment

Accounting period control•Right place, right time

Schedule and Task Management•Checklists

JE review & approvals

• Peer Reviews?Trend analysis•Financial Statements•GL Account•Cost Center•Cost Unit

Balance Sheet Reviews•Specifications

Management Reporting

Periodic Closes Management Package Overview

Accounting basis

Accounting basis is IFRS. Generally IFRS and DAS theories are aligned.

Kenya adopted IFRS in 1999.

Differences: presentation formats, inventory costing

methods allowed, audit requirements for small

companies, practical Chart of Accounts structure.

Transfer Pricing

Current policy is "apply but do not charge". Effectively transfers are at cost-price.

No Royalties. No Head Office charges. No mark-up

on inventory.

Revenue Recognition

Transfer of title, control, and risk: Delivery of

vehicles.

Prepayments from customers are not

recognized as revenue until vehicles are delivered.

Currently no revenue deferral for included

services on vehicle sales.

Profit Centers

Kibo in total treated as a single Profit Center

Cost Centers

P&L costs have been assigned to departments via "cost centers" for all

types of expenses

Cost Centers: Plant, Sales, After Sales, GASS, Training,

Product Development, Procurement, M&A

Excise Tax assigned to Sales cost center

Standard Levy Tax to Plant CC

No cross-department allocations/splits are

reflected [staff are 100% assigned to a single cost

center]


COGS

Costs of goods sold are aligned to revenue

recognition of vehicles delivered.

Includes direct materials, and PLANT

cost center; production and warehouse

Direct and indirect wages, facilities,

depreciation, supplies; "production overhead"

Adjusted for estimates of WIP & FGI [estimate

added to inventory valuation]

Expense recognition

Expenses are matched to corresponding

periods.

Depreciation of IP and fixed assets

Prepayments for rent, insurance, services are

amortized to associated periods

Staff costs

Classifications between FTE payroll / external /

casual labor

Provisions for vacation days, variable compensation

Other

Currently no provisions/estimates for standard warranty costs

No Allocation for Service Contracts and

Deferred Revenue

Budget P&L focus on cash spending and

funding; no comparative basis P&L

Future enhancements

Split profit centers within KIBO: Sales, After

Sales, GASS, Training

Revenue and COGS at profit center level

Allocation keys for OPEX: staff, facilities,

depreciation, supplies, etc…

Standard warranty provisions

Deferred revenue for included Services

Current Month and YTD results


Functional P&L•COGS, Gross Profit, Cost Center Costs, Operating Income•Sales Variance Analysis

Cost type P&L:•COGS [DM only]•Focus on Expense categories

COGS Breakdown•Present the various cost elements of COGS/unit

B/S & Metrics•Return on Sales• Inventory Turns

YTD Cash usage

Headcount•Cost center level vs. Budget

Benchmarking•Financials vs. Global Public Motorcycle Makers

Initi

al S

ugge

sted

Rep

orts

• ROA• ROE

• Factors driving ROE [3 ratios]

finance training final

Documents