CONSULTATION DRAFT Executive summary Global management principles©

Driving better business through improved performance

The Global Principles have been developed to support chief executives, boards of directors and chief finance officers to benchmark and improve their management accounting practices and processes to meet the needs of their organisation, both effectively and efficiently. The consultation closes on 10 May 2014. Responses should be sent to [email protected] Executive summary

Global Management Accounting Principles: driving better business through improved performance

Introduction

Globalisation and technological progress are making These Principles outline the fundamental values and change harder to predict and organisations more qualities that represent best practice management vulnerable. Large and small, public and private, accounting. They provide a common framework and must compete in an increasingly inter-connected the ability to help those responsible make the most and international market. Innovation is delivered appropriate use of the information at their disposal. faster, and the very concept of long-term competitive advantage is being undermined as both the volume , with its focus on past and velocity of information flows increase, and activity, is no longer sufficient. To be confident of a intellectual property becomes further commoditised. successful future, organisations must adopt a robust management accounting system that complements Organisations must do more to respond their financial accounting system. The Principles will appropriately to risks and protect the value they provide the forward-looking focus and ability to link create, at a time when available information has different functions in a way that many organisations never been more abundant, more complex or more still lack. difficult to interpret. The Principles have been applied to the performance Against this backdrop, management accounting management cycle that is used to oversee the is more relevant than ever. Forward and outward- development and execution of the business model, looking, it brings structured solutions to unstructured linked to the core areas of responsibility of the problems, ensuring organisations have the quality CFO. The business model lies at the very heart of of data, the analysis and the judgement to ensure an organisation (see Figure 1) and the management the best decisions are made and communicated accounting system should be at the core of any effectively. organisation’s business model. The focus of the second principle, “Modelling value creation”, is on But the practice of management accounting this interaction between management accounting across different organisations is varied. That is and the business model. Management why the Chartered Institute of Management report on the business model to decision makers, Accountants (CIMA), alongside the American but they also identify future activities that the Institute of Certified Public Accountants (AICPA), organisation may want to pursue and the risks are launching an authoritative set of Global that require relevant responses. Management Accounting Principles to help organisations across the world ensure that they have the very best management accounting systems.

1 Global management accounting principles – Driving better business through improved performance Figure 1: The role of finance mapped to the performance management cycle and business model

NAL ENVIRONM XTER ENT E RTUNITIES/THRE OPPO ATS O TS Governance P EA PO R asury and ca R TH Tre sh TU S anagemen N E ax m t Bu I TI t dg T I gic nt et IE N te me ing S U ra ge T T St a H R an R O m D C E P Strategy at a o A P a n st T p d S O l l tr a a m a n g n n O S r in n a T e t i s P t r n n fo A a P x o g r E E p g m O e R e a R r m t T H i T e o U n n utpu N O ts t S E I I T

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SUPPORTED BY EFFECTIVE MANAGEMENT ACCOUNTING FUNCTION AND PROCESSES

Management Accounting This helps to ensure that long-run value is created for stakeholders. This flow is illustrated in Figure 2.

Definition:Management accounting creates The business model is the means by which the organisation creates value, and because management value and ensures sustainable success by accountants have a thorough understanding of the contributing to sound decision making through organisation, they are uniquely placed to contribute the comprehensive analysis and provision to sustainable success. of information that enables and supports organisations to plan, implement and control the They provide evidenced-based solutions to the execution of their strategy. problems of managing cost, risk and value within an organisation, using both financial and non- financial information for justification. Management Management accountants use relevant and accountants provide analysis and insight within the accurate information to improve the organisation’s context of macro-environmental factors to benefit performance through better decision taking. the organisation commercially.

2 Figure 2: What management accountants do

Define, collect Analyse Generate Communicate INFORMATION and store data data insight

Contribute to Facilitate execution Manage and PERFORMANCE decision making of decisions improve performance

SUCCESS Create value for stakeholders over time

The Global Management 2. Modelling value creation Accounting Principles Objective – To simulate different scenarios that demonstrate the cause-and-effect relationships The Global Management Accounting Principles between inputs and outcomes. are derived from this definition of the discipline. They are a set of statements that describe the This requires a thorough understanding of the fundamental values, qualities, norms and features business model and wider macro-economic to which management accounting professionals environment. It involves the analysis of information should aspire and that represent best practice. along the value creation path, the evaluation of opportunities within this context, and a focus on There are three major Principles, underpinned by the risks, costs and value of opportunities. the professional values of management accountants, as shown in Figure 3. 3. Communicating with impact Objective – To drive better decisions about strategy 1. Preparing relevant information execution at all levels. Objective – To ensure that organisations plan for their information needs when creating tactics This involves communicating the results of scenario for execution. analysis in a manner that is tailored to the decision being considered as well as to the decision-makers This involves the identification, collection, validation, (or other audiences). It requires breaking down preparation and storage of information. It requires complexity and transparency about how conclusions achieving an appropriate balance between: have been reached.

• past, present and future-related information Each principle is broken down into three further • internal and external information sub-principles, as discussed in detail in the main • financial and non-financial information. consultation draft document which is available at www.cimaglobal.com/principles

3 Global management accounting principles – Driving better business through improved performance Figure 3: The Global Management Accounting Principles

COMMUNICATING WITH IMPACT

MODELLING VALUE PREPARING RELEVANT CREATION INFORMATION

Values of management accountants: Professional, Relevant, Innovative, Diligent, Ethical

4 How are the Global Management In alphabetical order they are: Accounting Principles applied? 1. Budgeting – the quantification of a strategically- aligned plan, for a defined period of time, which In successful organisations the role of management may include planned sales volumes and , accounting is clearly linked to current and future resource quantities, costs and , , corporate goals. The Global Management Accounting liabilities and cashflows as well as other non- Principles connect the dots, ensuring a direct line of financial metrics. sight between the organisation’s objectives and the practices and processes of management accounting. 2. Cost transformation and management – the They are applied to what management accountants exercise of cutting waste while maintaining or (are expected to) do at work and so affect enhancing value creation. It involves the sustained management accounting: identification and reduction of waste across the organisation while freeing up resource to invest • professionalism in innovation that will drive future value • process for stakeholders. • practice. 3. External reporting – provides users of external Underpinning everything that management reports with an integrated and comprehensive accountants do are the values of the profession. view of the organisation’s financial and These are professionalism, relevance, innovation, non-financial past performance, business diligence and ethics. model, risks and strategy.

The Principles are applied to processes and practices 4. Financial controls – the policies, processes and through the business model, see Figure 1. The procedures put in place by organisations to performance management cycle is the process to manage, document and report their financial which principles are applied. The performance activities as compared to plan. They ensure management process includes strategy, planning, that resources are correctly and effectively execution and review. used and that activities are correctly and accurately reported. The activities around the business model are the practices to which the Principles are applied. Twelve 5. Investment appraisal – the assessment of whether main practice areas are discussed. or not to pursue a particular investment based on alignment with strategy, prioritisation of options, affordability and acceptable returns versus unacceptable risks.

5 Global management accounting principles – Driving better business through improved performance 6. Price and product decisions – deciding what 11. Strategic tax management – the role of tax to produce or what service to provide and in financial analysis and decision making determining the selling price for products while ensuring proactive management of the and services. organisation’s tax position to ensure legal requirements are met. 7. Project management – integration of all aspects of a project, ensuring that the proper knowledge and 12. Treasury and management – the corporate resources are available when and where needed handling of all financial matters, the generation and, above all, to ensure that the expected outcome of external and internal funds for business and is produced in a timely, cost-effective and quality- incorporating the management of currency controlled manner. and interest rate risk, bank facilities, funding and cash management. 8. Regulatory adherence and compliance – the fulfilment of statutory and regulatory obligations in relation to accounting, statutory reporting and tax Consultation process and other regulatory compliance. The objective is The main consultation document is open for public to prevent penalties and other enforcement activity consultation from 10 February to 10 May 2014 and and promote the reputation of the organisation for we would very much welcome your feedback. Please good corporate citizenship. email your responses to [email protected]. Once the consultation period closes we will refine 9. Resource allocation – the funding of strategic the document, before launching it in Q3 2014. execution through the optimal distribution An online diagnostic tool will follow. of scarce resources across the organisation. It aims to ensure business decisions are made For more information please visit with due consideration to the priority of scarce www.cimaglobal.com/principles resource availability.

10. Risk management – the process of understanding, managing and controlling the risks that the organisation is exposed to while attempting to achieve its corporate objectives. Awareness and management of these risks can help the organisation to deal better with uncertainty and reduce the probability of not fully executing its strategy and/or failing to meet stakeholder expectations.

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