Treasury Tech: How to Use a TMS to Calculate Accounting Values

Calculating accounting values has traditionally been a central and valuable feature of TMS technology. The TMS database includes a definition of the accounting rules for each required quantity, which in practice requires an elaborate data storage, logic and calculation solution for effective performance. The requirement reflects the corporate structure and transaction set used in treasury, ranging from simple loans and deposits, foreign exchange (FX) spots and forwards to complex debt issues, derivatives and cash management operations.

A further complexity is presented in treasuries using inter-company transactions and bank accounts, which require a different accounting treatment from external transactions and accounts. The chart of accounts for treasury transactions is also entered, showing how the results – the accounting debit and credit journals – are to be mapped to the general ledger. Once set up, the rules and processes comprise treasury’s specific ‘accounting framework’. This responsibility is often shared between treasury and the accounting or finance department, and may also involve operating subsidiaries’ finance teams.

The underlying revaluation calculations include interest accruals; discount accretions; unrealised FX and commodity gains; and losses and principal amortisations. Calculation may require revaluations using current or other market rates, volatilities and prices, which can involve importing independent data from dependable sources. Where volumes are relatively high and/or the risk of error from manual operations considered significant, the necessary data will be imported into the TMS – perhaps by an automatically scheduled process to optimise control.

The way in which the account framework is managed technically varies markedly with the core design of the TMS. Some older systems were developed with the accounting function at their core, reflecting corporate treasuries’ evolution from accounting departments. Implementing such systems often requires setting-up accounting definitions as the first step. Some have been re-written to reflect today’s cash flow centricity of treasury operations.

There is a significant difference of flexibility in the effort required to change accounting frameworks when comparing different TMSs. Complexities often occur in response to corporate actions such as mergers and acquisitions (M&As), changes in enterprise resource planning (ERP) requirements and implementing new corporate ERP solutions. The work involved can range from simply reconfiguring the accounting framework using standard TMS treasury accounting functionality, to effectively re-implementing the TMS.

In its basic form, the results of treasury accounting calculations are reported on a monthly detail and summary basis, for use by treasury accountants and administrators and external departments. TMS control ensures that balanced journals are generated and errors reported for repair.

Cash accounting

Treasury accounting involves the generation of journals based on cash flows originating in treasury. These include opening and closing flows for money market loans and deposits; borrowings and investments; interest rate swaps; FX hedges and stand-alone cash transfers. Additional requirements include managing flows relating to derivatives, such as option premium payments and forward rate agreement (FRA) settlements, and for netting, pooling and cash concentration operations.

Cash accounting is of special interest to many North American treasuries, as outlined in
this earlier article

Treasury nominal ledger

The evolution of TMSs saw a contrast develop between those that simply reported accounting results and those which maintained an internal nominal ledger. Today the treasury nominal ledger is a standard TMS feature, as a miniature accounting system specifically designed for internal treasury purposes.

Part of the database, assigned to the nominal ledger, stores details of the required accounting results and maintains account opening and closing balances. System functionality enables accounting periods to be closed and reopened in controlled conditions. The nominal ledger enables trial balance, balance sheet and profit/loss reporting to be performed for treasury as required.

The treasury nominal ledger is essential for finance company subsidiaries’ statutory reporting. This requirement adds complication, as the accounting framework must accommodate additional types of accounting entry for activities such as payroll and premises costs, so the entry of stand-alone journals may be needed. It should be stressed that many TMSs can support finance subsidiary accounting requirements, but the accounting module is not really a general purpose accounting solution.

The TMS reporting and communications function is used by some in-house banks (IHBs) to prepare subsidiaries’ accounting reports, providing control and efficiency benefits through centralisation. This means the TMS nominal ledger must support different accounting frameworks, as subsidiaries’ requirements, including accounting period definition, may vary across the corporate infrastructure.

The evolution of effective treasury nominal ledgers has reduced the need for treasuries to use third party solutions for accounting, improving the efficiency, control quality and cost performance.

Investment accounting

Investment accounting is a specialised function not fully accommodated by many TMSs. This reflects the investment management industry’s focus on transactions and especially on positions, as opposed to the cash flow orientation of today’s corporate TMSs. Investment policy may require the use of profit/loss calculation methodologies such as First In, First Out (FIFO) and Last In, First Out (LIFO), average cost and lot matching, which require additional database and functionality. The design of TMSs may not reflect the needs of actively traded investment portfolios, as discussed in
this earlier article
. Treasuries that focus on dynamic investment management may need to invest in higher end or specialist TMSs.

Interactions with ERPs and accounting systems

Most treasuries transfer the accounting results in the form of summary or detailed journal entries for posting to the corporate general ledger. This may be performed manually, especially where a monthly process performed in summary, with treasury using its own detailed nominal ledger for internal accounting requirements.

However, many companies require that detailed treasury accounting journals be used to update the corporate general ledger. This process is often automated for control and efficiency purposes. The technical method used may involve the creation of a file of journal entries by the TMS; this is exported to the corporate network for collection by the ERP or accounting system. More robust host-to-host middleware-based integrations may be used. The TMS is responsible for accurate information and the results may be automatically pushed into or pulled out by the receiving system in the tightest integrations.


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