Challenges of Accrual based Accounting in Telecom for Prepaid Services
September 22, 2018
- Posted by: Admin
- Category: ERP
- September 22, 2018
- Posted by: Admin
- Category: ERP
Over the last few years, an increased number of ISP/D2H/TELECOM/IPTV companies, public sector, NGOs, and governments have moved to accrual-based accounting for better bookkeeping reporting. Having a collaborative scalable solution has become a necessity for most households and commercial entities thus making it possible for ISP/D2H/TELECOM/IPTV companies to smile all the way to the bank. As a result, most ISP/D2H/TELECOM/IPTV companies have fully embraced accrual-based accounting methodologies to operate efficiently. Many have adopted the culture of keeping balance sheets, cash flow statements and profit and loss account for enhanced efficiency, improved accountability and easy management of assets. Generally, accrual-based accounting provides more inclusive financial information for companies.
While accrual-based accounting works tremendously well for ISP/D2H/TELECOM/IPTV, this bookkeeping reporting has its own challenges for the companies.
Accrual accounting forms one of the two major types of accounting methods for businesses using IFRS compliance. Under the accrual accounting, businesses record revenues whenever the transaction occurs and not when the actual cash payment for the sale is received. Likewise, expenses are recorded and recognized in the period for which the related revenue is recognized; under matching principle.
Accrual accounting is particularly useful for companies that have to report inventory or have large accounts payable or accounts receivable. The financial impact of loans, credit accounts and prepaid services are considered more carefully under accrual accounting.
Typical challenges of accrual-based accounting for ISP/D2H/TELECOM/IPTV?
Complex & not easy to manage: One of the major challenges of accrual-based accounting for ISP/D2H/TELECOM/IPTV is that it can be a bit costly, complex and difficult to manage. Secondly, accrual basis accounting demands that transactions be recorded as they occur. Unfortunately, most invoices fail to coincide with the actual occurrences thus leading to guesswork and estimations on the part of the designated accrual accountant. Such uncertainties make it difficult for accrual basis accounting accountants as compared to cash basis accounting. For proper planning & budgeting, all the compiled financial information has to be accurate and right at all times which is not always the case with accrual-based accounting.
Easy Deception of financial statements: Apart from its complexity, accrual-based accounting can easily lead to accounting malpractices. Its inaccuracies and estimations have become a loophole for numerous rogue companies who capitalize on these weaknesses to camouflage their own financial reports mistakes and weak points. In simpler terms, this kind of accounting can be advantageous in so many ways yet can be easy to manipulate for fraudulent purposes. In fact, it is alleged that most ISP/D2H/TELECOM/IPTV companies end up with bloated Planning & Budgets due to an inaccurate accounting of expenses and revenues. Financial statement mistakes and confusions are inevitable in this type of accounting which is a big disadvantage for most ISP/D2H/TELECOM/IPTV companies.
High Switching Costs are involved: Moving from the traditional cash to accrual accounting involves high costs which can be a huge challenge for many companies. Switching from one form of accounting to another poses a big challenge for ISP/D2H/TELECOM/IPTV. In reality, most start-up, small and medium-sized companies experience cash-flow challenges at inception. Well, the majority of these ISP/D2H/TELECOM/IPTV businesses start by embracing the common cash-based accounting. As time goes by, the business is bound to expand making it extremely difficult for investors to monitor their cash flows effectively. In such situations, it is wise and appropriate to move from cash basis accounting to the more effective accrual-based accounting but at a cost of course.
Additionally, accrual basis accounting can be time-consuming during conversion and exposes many ISP/D2H/TELECOM/IPTV businesses to bankruptcy risks. Lastly; this type of accounting requires ISP/D2H/TELECOM/IPTV companies to pay huge income taxes even before they have actually collected their revenues fully.
Advantage Oracle Apps: Designed in part by professional accountants, the Oracle system is updated whenever there are changes in either government accounting requirements or the generally accepted accounting principles (GAAP). Since accrual accounting tends to ignore time and instead focuses on economic events, cash flow can be problematic, but the Oracle system can also help to create statements of cash flow through the Oracle Enterprise One General Accounting System.