Dynamics AX Fixed Asset Module

Parallel accounting according to the “Cost of Sales” and “Nature of Expense” accounting method (1)

18 Saturday Jun 2016

Posted by Ludwig Reinhard in Accounts Payable, Accounts Receivable, Fixed Assets, General Ledger, Inventory

Tags

Cost of Sales Method, Nature of Expense Method, Posting setup, Profit & Loss Statement

International operating companies are often required to prepare financial statements that follow different accounting methods/regulations.

Especially local units of international business conglomerates that operate in a foreign country regularly have to prepare financial statement in one format for local accounting standard setters and in a different format for corporate headquarters.

In the European Union you will often face situations where companies have to prepare financial statements according to the so-called “Cost of Sales” (COS) Method for corporate headquarters and according to the “Nature of Expense Method” (NOE) for local accounting bodies / tax offices.

Within the following subsections I will illustrate how both methods – the COS and the NOE method – can be setup in parallel in Standard Dynamics AX.

Before digging into details, let’s have a look at the major differences between the COS and NOE accounting method.

A. Overview major differences between the COS and NOE accounting method
In the European Union (EU) different regulations are applicable when it comes to the use of COS and the NOE accounting method. As an example, the EU directive 2013/34 specifically describes both methods in detail by referring to the “Function of Expense” (COS) and “Nature of Expense” (NOE) method. Similar regulations can be found e.g. in Germany and Austria where legal regulations detail the differences and requirements of both methods. Irrespective of differences in the nomenclature, the major differences between the COS and NOE method can be recognized in the structure of a company’s Income Statement. The next screen-print compares those structures by showing the COS method on the left and the NOE method on the right.

Despite the summarized comparison of the different Income Statement formats, major differences can be identified in the inventory, human resource and fixed asset sections.

From a finance & controlling perspective, an important difference between the COS and NOE method is related to the data sources required for generating both financial statement formats. That is, while the NOE method does only require data from the accounting department, the COS method also requires cost / management accounting information in order to break down the costs by functions.

The next subsection details the sample data used for the illustrations shown in this post. This section is followed by a in depth specification of setups required in Dynamics AX and their effects on corporate financial statements.

B. Sample data
To illustrate you the differences between the COS and NOE method, a number of transactions have been recorded that are based on the following process flow:

The process flow that you can identify from above starts with the purchase of raw materials, which are later on partly returned to the vendor (due to quality problems). The next transactions are related to inventory adjustments in the warehouse. Thereafter, several transactions originating from the non-operating/administrative areas will be illustrated before the differences in the production process of finished goods will be explained in detail. The process flow finally ends with the investigation of the differences in regards to the sale of the produced goods.

C. Process illustrations
In the following, each of the different colored elements shown in the prior process flow diagram will be analyzed and explained in separate sub-chapters.

C.1. Purchase & return of materials
For purchase related material transactions, the major difference between the COS and NOE method is that the COS method does not affect a company’s Income Statement and thus its profit whereas the NOE method initially expenses the complete purchase of the materials. As a result, the company’s profit instantly decreases when the NOE method is applied.

If nothing else happens with the materials (that have been purchased) over the period, the profit reduction is subsequently offset by an adjustment (so-called “stock variation”) transaction. The next screen-print illustrates the differences between both methods just described in an accounting like format.

What can be identified from the COS method transactions shown on the left-hand side of the prior illustration is that the purchase of materials does only affect the company’s Balance Sheet (BS). The NOE method related transactions do on the other hand side – at least temporarily and depending on changes that occurred to stock levels over the month – also influence a company’s Income Statement (IS).

From what has been said so far, two major disadvantages of the NOE method can be identified.

The first disadvantage is that you cannot control and analyze your inventory values within a financial period as the financial inventory values are only correct after the adjustments (“stock adjustment/variation transactions”) have been recorded at the end of the month.
The second major disadvantage of the NOE method is that the stock variation postings at the end of the month are typically done on a summarized basis, which prevents you from running detailed item related product Analysis out of the box.

Irrespective of the disadvantages mentioned and against the background of the accounting transactions illustrated in the prior screen-prints, the question arises how the COS and NOE method can be aligned with each other in a way to get both Income Statement formats out of Dynamics AX in parallel?

The following illustration tries answering this question by showing you that both accounting methods can be aligned with each other through an additional and parallel expense and stock variation transaction (highlighted in yellow color). Please see the lower part in the next illustration.

Given that our company creates two purchase orders – one for 2 TEUR and a second one for 3 TEUR – two additional “stock variation transactions” are recorded. The major difference to what has been explained before is thus the number of stock variations recorded. That is, rather than posting a single “large” stock variation transaction at the end of the month, several “small” stock variation transactions are recorded with each and every purchase.

A major advantage of this procedure is that there is no need for a (manual) analysis and recording of stock variations at the end of the month, which frees up some time for doing other things during the often busy month end closing period.

Note: The ledger accounts used for the additional material expense and stock variation postings debit and credit Income Statement accounts. As a result, no effect on a company’s profit arises. For the preparation of an Income Statement according to the COS method this result thus implies that assigning both accounts to the same Income Statement section will not influence a company’s profitability, KPI’s, etc.

After investigating how the COS and NOE method can be aligned with each other in a way to generate the transactions required for both accounting methods, the questions arises how to setup Dynamics AX in order to get those additional material expense and stock variation postings automatically recorded? From a “technical” Dynamics AX perspective, the following two options might help getting those additional postings recorded.

Option 1: Activate the “post to charge account in ledger” AP parameter
The first option makes use of the “post to charge account in ledger” parameter that can be found in the Accounts Payable parameters form. Activating this parameter results in an additional charge (expense) and stock variation posting on the ledger accounts specified in the respective sections of the inventory posting matrix illustrated below.

On first sight, this seems to be exactly what is needed for a parallel use of the COS and NOE method. Yet, a detailed investigation of this functionality shows that the additional posting triggered through the activation of this parameter only applies to ordinary purchase related transactions but not to vendor return transactions. Because of this shortcoming, this first setup option won’t be used in the following.

Option 2: Make use of automatic charge codes
Due to the limitations of the first option, an automatic charge code is used instead. The next screen-prints illustrates the setup of this charge code that debits an expense account and credits a stock variation account.

Once the charge code is setup, it is linked to an automatic charge in order to generate an additional posting equivalent to the one created for the materials purchased. This requires that an automatic charge percentage of 100% is applied, as illustrated in the next screen-print.

In order to enable you tracking what has been mentioned above, the following purchase order related transactions are recorded in a Dynamics AX demo environment:

First, on 1^st and 2^nd January, the packing slip and vendor invoice for the purchase of a first raw material. In total 1000 pcs of the material are purchased for a price of 10 EUR / pcs.
Second, on 3^rd and 4^th January, another 1000 pcs of a second raw material item are purchased. This time the purchase order packing slip is posted with the price the materials were ordered for (10 EUR / pcs) whereas the vendor invoice is recorded with a slightly higher price of 12 EUR / pcs.
Finally, on 5^th and 6^th January, a vendor return order is created for 50 pcs of the first raw material that did not pass quality tests.

The following illustration chronologically summarizes the transactions that will be illustrated and analyzed next.

To be continued in part (2)

Budget control for fixed assets – Part 1: AX2012

16 Saturday Apr 2016

Posted by Ludwig Reinhard in Fixed Assets

≈ 9 Comments

Tags

budget control, Budgeting, Fixed Assets

Within this and the following post I would like to show how one can setup budget control for fixed assets in AX2012 and AX7. Let’s start with the setup and configuration in AX2012 first by referring to the following example.

Setup
The first step in my setup process is specifying the main account that is used for posting fixed asset acquisitions in the fixed asset posting profile form. Please note that the main account setup here (account no. 180100) is a balance sheet account.

Because I am aware that the budget control configuration form does only allow setting up a single account structure, I setup my ledger with only one account structure that includes all of my balance sheet and income statement accounts.

My next step was selecting this account structure in the budget control configuration form and specifying that budget control shall be executed at the main account level only.

To let Dynamics AX check and ensure that I do not spent more money than the amount budgeted, I setup the following budget control rule, which defines that my main (balance sheet) accounts that start with “180” shall be subject to budget control.

Record budget amounts for the fixed assets
After setting up and activating budget control, I recorded fixed asset budgets for the different fixed assets that I setup for the years 2020 to 2024. For details, please see the next screen-print.

After transferring those budget values to the budgeting module, I double-checked the amounts transferred and updated the budget balances.

A first thing that I noticed in the budget register entry form was that the first column denominated “budget check results” did not include a green check mark for my transferred budget values.

As I wanted to compare this behavior with the one that can be identified for ordinary expense related budgets, I modified my budget control configuration and setup a second budget control rule for my travel expense accounts. Once that was done, I recorded a budget for one of those travel expense accounts and noticed that Dynamics AX automatically shows me a green check mark when entering the budget amount. Please see the next screen-print.

Post vendor invoice
Irrespective of the issue with the green check mark and after having done all the necessary setup, I finally tried recording and posting a vendor invoice. Please note that the invoice amount that I entered exceeds the budgeted amount. Details of my test are included in the next screen-print.

What you can identify from the screen-print above is that Dynamics AX allowed me posting the invoice for my fixed asset even though the invoice exceeds the budgeted amount by 25000 EUR.

This was not quite what I expected. For that reason, I changed the budget control configuration several times in order to execute the budget control at different levels and with different main account-financial dimension combinations. Yet, irrespective of the budget control configuration that I used, I was always able to post the vendor invoice even though the posted amount exceeded the budgeted one.

Solution: Code adjustment
After this disappointing result, I started having a look at the program code that is responsible for executing the budget control check and noticed that standard Dynamics AX runs the budget control check only for expense, profit&loss and total accounts. As balance sheet accounts – such as the one that I setup for my fixed asset acquisitions – are by default excluded from budget control, I slightly modified the code in the following two methods:

Second test run
Once the code adjustments were implemented, I setup a new fixed asset and entered a budget for it. The next screen-print shows you the process of entering the budget amount for the newly created fixed asset. The main difference that you can identify in the screen-print below compared to the earlier budget registration is the green check mark in the budget check column.

Please note that the previously recorded budgets for my „old“ fixed assets are not influenced by the code change, which induced me setting up a new fixed asset and fixed asset budget for the following tests.

With the new setup in place I tried once again recording a vendor invoice for the acquisition of my fixed asset. Interestingly and different from before, Dynamics AX did now prevent me from posting the invoice as the total invoice amount exceeded the budget amount. Please see the next screen-print.

After reducing my total invoice amount to one below the total budgeted amount I was finally able to get the invoice posted.

Summary
By doing some little code modifications you can let Dynamics AX check available budgets for balance sheet accounts. An important prerequisite for this budget control check is that the balance sheet accounts – for which you want to have the budget control enabled – are included in the account structure that is setup in the budget configuration form. In other words, if you want to have also balance sheet accounts checked for available budget funds, you might have to reconsider the setup of your account structures e.g. by including all accounts into a single account structure and by making use of advanced account structure rules.

Please do also note that additional code modifications are necessary in the budget control inquiry forms to get the balance sheet accounts included for subsequent comparisons.

Within the next post I will take a look at the same process and differences in the new Dynamics AX7. Till then.

Construction in progress & project module

13 Friday Nov 2015

Posted by Ludwig Reinhard in Fixed Assets, Project

≈ 6 Comments

Tags

Construction in Progress, Fixed Asset, Fixed asset statement, Project

This blog post illustrates how you can use the Dynamics AX project module to track the costs of constructions in progress and transfer those costs later on to a fixed asset once the construction is finished.

Before you are able to track the costs of your construction in progress you have to ensure that an investment project group is setup that accumulates all costs on balance sheet accounts as illustrated in the next screen-print.

Once your investment project group is setup, you need to create an Investment project…

… that you use for recording all construction costs. In my case, I recorded hour, expense and item costs that add up to a total of 17300 EUR as shown in the next screenshot.

Once your construction project is finished and provided that all costs have been recorded on your project, you can transfer those costs to a fixed asset by using the estimate function.

The first step required in the estimate form is creating an estimate that accumulates all costs recorded. This can be done by selecting the “set cost to complete zero” cost to complete method.

After the estimate is created you can identify the total costs accumulated in the WIP tab of the estimate form. Example:

The next steps required are (a) specifying the fixed asset to which you want to transfer all costs and (b) posting the estimate.

Please note that posting the estimate does not create any ledger transaction and does not transfer any costs to the fixed asset selected. To do the actual transfer of the costs to the fixed asset, you need to eliminate the posted estimate by using the corresponding functionality.

After the elimination is done, you can identify the costs on the fixed asset selected before.

Note 1:
In the example used, the construction started and finished within a single month. If you are working on long-term construction projects and want to update your “construction in progress” fixed asset in the fixed asset module you need to:

Post the additional costs that arise in the following months as usual,
Reverse the elimination recorded previously,
Create and post and additional estimate,
Eliminate the estimate.

Those steps need to be repeated every month as long as your project runs.

An alternative to reversing and repeating eliminations recorded before, you can separate your investment project into subprojects that are eliminated successively as the construction progresses.

Note 2:
If you are eliminating your construction projects on a regular basis, those costs are included in your fixed asset module and thus in your fixed asset statement.

If, on the other hand, you are not eliminating your project construction costs on a regular basis, all costs are accumulated in WIP (balance sheet) accounts only and are not included in the standard Dynamics AX fixed asset statement. In order to get your fixed asset statement right, you thus need to include the WIP accounts in your fixed asset statement which requires that you either use the Management Reporter for your fixed asset statement (see the previous post) or that implement a system adjustment.

Note 3:
If you are transferring all construction costs initially to a “in construction” fixed asset, you can move all costs from this “in construction” fixed asset to an ordinary fixed asset by using the standard AX fixed asset reclassification functionality. Example: