Process for Calculating the Accrual for Unrecorded Liabilities for ABC Inc.
Background Information

The ABC Inc. Segment maintains an accrual for an estimate of unrecorded liabilities in account 2162030 (Accrued Other Accounts Payable) in profit center US09999G. Twice a year (Q1 & Q3), the estimated accrual for unrecorded liabilities is reviewed to determine the adjustment needed. If the calculated adjustment results in less than a $xx million change, the segment accounting team will use judgment to determine whether an adjustment to the GL balance will be made in that quarter. If the calculated adjustment results in greater than a $10 million change, the segment accounting team will use judgment determine the dollar amount of the adjustment to be made. Beginning with Q3 FY14, the review is completed in the first month of the quarter instead of the second month of the quarter as had been previously done.

The estimate for unrecorded liabilities is determined utilizing the report RB0250_US “Invoice Accrual Report.” This report displays, for a given period and restrictions, the amount of invoices that are posted to the general ledger in a period subsequent to the date of the invoice (i.e. in SAP, the document date (which represents invoice date) is in a period prior to the posting date.) Prior to Q3 FY13, the estimated accrual was based on a six month history of the “Invoice Accrual Report” and was calculated on the previous two quarters. Beginning in Q3 FY13, the estimated accrual was based on a trailing 12 month history of the “Invoice Accrual Report.”

In Q1 of each fiscal year, the assumptions used in the calculation of the estimate of unrecorded liabilities are evaluated; these assumptions include any accruals done by other business areas that impact ABC Inc. segment that should be removed from our calculation of the estimated accrual, as well as the general ledger accounts that should be included / excluded from our analysis and the document types that should be considered.

Assumptions for FY14 Calculation

In March 2014, the general ledger accounts and document type selections to be included when running the “Invoice Accrual Report” were evaluated.

* For analysis of general ledger accounts to be included or excluded in the “Invoice Accrual Report”, see “General Ledger Accounts Analysis for Unrecorded Liabilities Calculation FY14” spreadsheet. This spreadsheet explains the accounts included or excluded from the “Invoice Accrual Report”, as well as reasons for why certain accounts were excluded (e.g. accrual is done by another team) or why certain location types are excluded for certain accounts (e.g. accrual is done for a certain location type and expense combination by another team.) * For analysis of document types to be included or excluded in the “Invoice Accrual Report,” see “Document Types Analysis for Unrecorded Liabilities Calculation FY14” spreadsheet. This spreadsheet defines the different document types appearing on the “Invoice Accrual Report” for the period under consideration, as well as indicates whether the document type will be included or excluded from the report.

Through discussions with various business areas during the process above to evaluate general ledger accounts to include / exclude from our analysis, it was determined that separate accruals are being done that are not limited to or cover certain minor accounts. Instead of trying to remove each specific general ledger account / location type combination from the “Invoice Accrual Report” that is accrued by another area, we received the amount of each area’s specific accrual and removed that amount from our estimated segment accrual for the quarter (e.g. dot com.)

Process for FY14 Calculation

For Q1 FY14, the periods used in the analysis were March 2013 through February 2014. The calculation of the accrual estimate is completed and reviewed before the end of the second month in each quarter (beginning in Q3 FY14 it will be completed in the first month of each quarter). The amount is communicated via the Accounting Watchlist to the Segment FP&A team so any adjustment needed to the accrual can be included in the segment forecast for the quarter. The entry to adjust the accrual is booked in the third month of the quarter.

For FY14, a variants of “Invoice Accrual Report” were created for the SGA and COGs accrual calculation in the Unrecorded Liabilities file (“e.g. RB0900_US@Invoice Accrual Report_COGS template) with the following information based on the analysis of the appropriate general ledger accounts and document types that should be considered for the accrual adjustment (as discussed above). The variables are as follows:

* Period / Fiscal Year: the analysis is done in the second month of each quarter, run for the previous twelve periods (for Q1 FY14 that range is March 2013 – February 2014) * Document type: see spreadsheet “Document Types Analysis for Unrecorded Liabilities Calculation FY14” for details * External segment: 2 (Denotes Walmart segment) * G/L Accounts: See spreadsheet “General Ledger Accounts Analysis for Unrecorded Liabilities Calculation FY14”

The “Invoice Accrual Reports” by month are accumulated in separate workbooks for COGS and SG&A expenses due to different assumptions used for those items. On each “Invoice Accrual Report”, several columns are added to calculate the estimated accrual of unrecorded liabilities for that month. * DPO – Days Payable Outstanding which divides the Total Days Payable column by the Count column from the “Invoice Accrual Report” * Days in Month – gives the average days in a given month (365 days per year / 12 months) * Estimated Accrual – Cost Amount / Days in Month * DPO. The estimated accrual calculation factors in the amount of time invoices have been outstanding (difference between posting date and invoice date) so that the same invoice outstanding for 90 days results in an estimated accrual larger than one outstanding for 30 days. * For calculation of the estimated accrual for COGS, see “Unrecorded Liabilities Accrual for COGS.” This spreadsheet contains a summary of the estimated accrual with 12 months of “Invoice Accrual Reports.” * In each month’s “Invoice Accrual Report,” the “estimated accrual” column is summed. * Any COGS accounts that were identified by the Inbound Transportation (James Waters) and Outbound Transportation (Susan Bradshaw) as being accrued monthly by their teams (see tabs “Inbound Trans” and “Outbound Trans” in the spreadsheet “General Ledger Accounts Analysis for Unrecorded Liabilities Calculation FY14”) are highlighted in grey for those location types (Inbound Transportation and Transportation - Retail) and are backed out the estimated accrual on each month’s tab. * The adjusted estimated accrual for each month is accumulated on the “Summary” tab and an average accrual for the 12 months is calculated. * The estimated accrual is taken to the “Unrecorded Liabilities Accrual Total” spreadsheet and is added to the average estimated SG&A accrual. * For calculation of the estimated accrual for SG&A, see “Unrecorded Liabilities Accrual Total.” This spreadsheet contains a summary of the estimated accrual, with the 12 months of “Invoice Accrual Reports” and other supporting documentation. * In each month’s “Invoice Accrual Report,” the “estimated accrual” column is summed. * The estimated accrual for each month is accumulated on the “Summary” tab * Various adjustments for the estimated SG&A accrual are made for expenses that are being accrued for by other areas (Dot com, logistics, transportation etc.) The supporting documentation for those items is in the workbook on tabs highlighted in green. * Beginning in FY14 Q1, we started making an adjustment for invoices where DPO > 365 days as the amounts are inconsistent from month to month and will skew the average unrecorded liabilities amount that we are trying to estimate with this process. * The adjusted accrual estimated is summed and an average for the 12 months is calculated. * The estimated accrual for COGS (discussed above) is added to the estimated accrual for SG&A expenses. The result is the total estimated accrual needed for the segment. * The result is compared to the existing accrual balance in account 2162030 (Accrued Other Accounts Payable – Non Merchandise) in profit center US09109G, which gives the estimated impact on SG&A expenses for the current quarter. This is the amount communicated on the Accounting Watchlist to the segment FP&A team if an adjustment is deemed necessary as described below.

Based on the results of the accrual calculation, if the analysis indicates a significant change from prior quarter, additional analysis may be necessary to determine if there were one-time invoices where specific accruals were done that may need to be adjusted for etc.

Based on the results of the accrual calculation, including whether the proposed adjustment is within the $10M threshold discussed above, the segment accounting & controls team will determine whether a journal entry is necessary. If an entry is necessary it will be prepared and posted in the third month of each quarter. The entry first reverses the previous quarter’s accrual, and then accrues the full amount of the calculated accrual for the current quarter. The liability is booked to 2169035 and the P&L impact is booked to account 5804040 in profit center US09999G.