Per FASB ASC Topic 230, the objective of the Statement of Cash Flow is to provide details about the cash receipts and payments during a specific period. In theory, the cash flow sounds fairly simple by capturing period inflows and outflows across operating, investing, and financing activities, adding those to the beginning cash balance and adding in the impact of change in foreign exchange rates. However, if I were to poll accountants in the insurance industry (or any industry) about their least favorite task, I would expect the cash flow would be at the top of the list. The cash flow is one of the biggest drains of time during the quarter-end reporting period to the point that its completeness is often measured by the size of the “adjustment.” In this blog, I am going to focus on the GAAP indirect method of preparation of the Statement of Cash Flows for the insurance industry and evaluate how Oracle EPM can streamline the aggregation process and improve financial controls, thus resulting in a more efficient reporting process.
Statement of Cash Flows Challenges Faced by Insurance Companies
For insurance companies, data, process, key personnel dependencies, and organizational change are the biggest hurdles when preparing the Statement of Cash Flows.
Data
For insurance companies, the source of the data is not always directly from the trial balance and there are many source systems that have the details necessary to provide clarity around the cash flow. To understand the detail requires analysis of the general ledger or other source systems (i.e. subledgers, admin systems, & investment management systems) to meet the reporting requirements.
Some considerations include:
Operating activities
- Depreciation of fixed assets
- Amortization of intangible assets
- Accretion of debt
- Impairment of intangibles
Investing activities
- Segregation of purchases, sales, and maturities of investment securities
- Purchases of fixed assets
- Acquired operations
Financing activities
- Repurchases of common stock
- Proceeds & redemption of long-term debt
- Contract holder fund deposits & withdrawals
- Shares issued/reissued under equity incentive plans
Process
Insurance companies commonly prepare the cash flow in Microsoft Excel, which is error-prone, lacks transparency, and does not provide financial controls. Due to the complexities and time -consuming tasks of aggregating data and calculating the movements in the balance sheet accounts, many times, insurance companies take a practical expedient approach and complete the cash flow at the consolidated level only. This poses challenges for insurance companies that have large accounting organizations or subsidiaries completing their underlying accounting entries, but do not have reporting responsibilities and do not provide details into the non-cash items recorded to the P&L. This approach makes it difficult to find the root cause of any out of balances in the cash flow as the process is not transparent and details are limited.
Key Personnel Dependencies
The preparation of the cash flow is typically the responsibility of one person or a small team to complete the supporting tasks, which results in personnel dependencies. As a result, the process becomes a “black box” that is difficult to train new team members and have others involved in the validation process.
Organizational Change
Microsoft Excel does not provide a scalable solution as insurance companies make acquisitions or mature over time. Change means new accounts, new entities, new data sources, etc. that need to be captured in the process to ensure a complete picture of the cash flow. Capturing these changes results in time-consuming tasks of adding worksheets or line items to the cash flow, making sure calculations are properly picking up the changes in assets, expenses, liabilities, equity, investment income, and premium accounts.
Cash Flow Reporting Optimization with Oracle EPM
Oracle’s Financial Consolidation and Close provides the ability to use out-of-the-box functionality to capture balance sheet movements using the dimensional hierarchy and system calculations that place financial controls around the change in balance sheet accounts. Financial Consolidation and Close also allows users to capture adjustments, such as non-cash adjustments to Net Income, within forms to ensure the preparers have a single solution to complete the end-to-end cash flow process. This means you do not need a large amount of customized logic that needs to be maintained and updated over time as the company matures and the chart of accounts changes. In the event there is an out of balance or a difference in the cash flow, the solution provides transparency into the results, allowing users to evaluate the driver of the difference.
The result of the solution is the accounting team will spend less time manually extracting data, aggregating data, formatting the cash flow workbook, and calculating the cash flow, and more time on analyzing results and confirming no additional adjustments are necessary. The solution also provides financial controls and governance that add a level of rigor that is not available in Microsoft Excel, thus driving trust from auditors and management.
Modernizing the Cash Flow Process
As I mentioned earlier, the cash flow requires an understanding of the underlying details of the data and organization to ensure the components are properly recorded, the cash flow balances, and, most importantly, is accurate. Many times, this requires a great amount of manual work in Microsoft Excel with no financial controls and limited time for analysis. Oracle Financial Consolidation and Close provides the financial controls and automation necessary to systematically prepare the cash flows, which reduces the burden on the reporting team and provides confidence to management and auditors.
We have helped several insurance companies implemented Oracle Financial Consolidation & Close to expediate the close process, including the preparation of the Statement of Cash Flows, resulting in more time for analysis, less oversight in the process, greater trust in the accuracy and reliability of results, and reduced risk for audit flags.
Questions to ask yourself:
- Do you have key personnel dependencies in the cash flow preparation process?
- Are you able to easily identify the underlying root cause of cash flow validation issues?
- Do you have modern controls around your cash flow process?
- Do you have a systematic approach to completing the cash flow?
- Are you able to easily capture and interpret non-cash items that need to be represented within the cash flow?
Alithya’s technical and functional knowledge of the preparation of the cash flows and the insurance industry helps provide our clients with actionable items to decrease the cash flow reporting process, gaining transparency into the process, and modernizing controls with a scalable solution.
For comments, questions, or suggestions for future topics, please reach out to us at infosolutions@alithya.com. Visit our blog regularly for new posts about Cloud updates and other Oracle Cloud Services such as Planning and Budgeting, Financial Consolidation, Account Reconciliation, and Enterprise Data Management. Follow Alithya on social media for the latest information about EPM, ERP, and Analytics solutions to meet your business needs.