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Management Accounting & Financial Control (R 66)
Lecturer: Prof. Henning Kirkegaard

Copenhagen Business School, Denmark
Exam Date: Dec 21, 1999



Project Report

Dynamic Accounting To Predict Future Cash Flows
A Tool For Management Decisions






Group no. 5
Group members:
Jonni Leporanta (FIN)
Muhammad M. Bhatti (PAK)
Nadarasa Subramaniam (SRL)
Thomas Steppuhn (GER)

 

 

 

 

 

 

 

 

 

Table of contents 1 Introduction 3
1.1 Overview and Task Definition 3
1.2 Brief Description of the Current Accounting System 4
2 The Problems of the Current Accounting System 5
2.2 Problems with Defining Terms 8
2.2.1 Assets 8
2.2.2 Liabilities 9
2.2.3 Owners Equity 9
2.3 The Problems with Financial Statements 10
2.3.1 Static, Instead of Being Dynamic 11
2.3.2 Out Of Date, Instead of Up To Date 11
2.3.3 Unclear, Instead of Being Clear 12
2.3.4 Incomplete, Instead of Being Complete 12
3 New Dynamic Accounting Theory 14
4 Description of the LogiCase Model 19
4.1 Introduction and Tasks of the LogiCase Model 19
4.2 Implementation 20
4.2.1 Registering Data 20
4.2.2 Structuring Using Cases 21
4.3 Features of LogiCase and Use of the Data 23
4.3.1 Liquidity Prediction 23
4.3.2 Generation of Traditional Financial Statements 26
4.3.3 Tool for Financing and Investing 26
4.3.4 Dynamic Control of Payments 27
4.4 Requirements, Environment and Comments 27
4.4.1 Interpretation of Data 27
4.4.2 Inclusion of All Data 27
4.4.3 Accounting Department 28
4.4.4 Entering Wrong Data 28
4.4.5 Training 28
4.4.6 Is Dynamic Accounting the Perfect Solution? 29
4.4.7 Size of the Company 29
4.4.8 Valuing Fixed Assets 29
4.4.9 Discounting of Cash Flows? 30
4.4.10 Possible Danger 30
5 Conclusion and Future Perspective 32
List of References 34

1. Introduction


1.1 Overview and Task Definition

The following project is divided into five parts which we would first like to describe briefly.
Chapter 1 consists of a description of the current accounting system.
In chapter 2, we will try to point out the lacks of this system which occurred in recent times. Hopefully, we will succeed in convincing the reader that a new system is hardly needed in order to provide objectively measured and clearly defined information describing the financial consequences of the actions of organisations - therefore managers would be able to make correct decisions.
In chapter 3 we will introduce you to this new dynamic accounting system and describe it in more detail. To analyse how this new model can be implemented, we are going to describe such a system in practise which will be our task in chapter 4. Furthermore, we want to point out the benefits and potential problems using such a system. At this place, we would like to thank Mr. John Eskaebek and Mr. Søren Ølund, the executive directors of the company SEFF Systems A/S for providing us with information about their new LogiCase system which is based on the dynamic accounting model. Our chapter 4 is based on this information.
In chapter 5, our last chapter, we're finally going to summarise and conclude the whole outline of our project followed by showing up a future perspective.



1.2 Brief Description of the Current Accounting System

Double Entry Bookkeeping (DEB) is an accounting system which has been in practice for about 500 years. In the DEB, transactions are entered into financial statements twice, once at the point of realisation and the second time when the amount is paid. So it basically treats the financial transactions in two periods of time, which are at the point of realization and at the point of payment.
Before we go into further details of DEB, we will see the differences between countries, how different countries are using the DEB. We will give you an example of the differences of accounting practice of countries following the standard of Continental Europe (Germany, France, Belgium, Greece, Italy, Portugal, Switzerland and Japan) and countries following the Anglo-Saxon standard (USA, Canada, Great Britain, Ireland, Australia and New Zealand, The Netherlands and Singapore). There you can find a difference of objectives between these two groups of countries. Some of the differences are shown below.
Continental European Countries:
· Accounts are prepared to provide information about the company's financial situation to creditors, tax authorities and investors
· Dominance of the prudence principle is followed
· Tendency towards lower extent of disclosure
· Tendency towards higher hidden reserves
· Taxation influences the financial accounting

Anglo-Saxon Countries:
· Useful information for investors to make decisions
· True and fair view
· Tendency towards higher extent of disclosure
· Tendency towards lower hidden reserves
· No mutual influence of taxation and financial accounting
(International Accounting, Peter Walton, Page 8)
2. The Problems of the Current Accounting System

In so many occasions, companies have faced serious financial difficulties that lead them to be insolvent just after publishing annual financial statements and auditing reports, which assured that these companies had been in a very stable and healthy condition. Almost after every collapse, the failures were explained as typical incidents. In several cases, the responsibilities for these failures were ironically transferred to the manager, either as he/she had made some forgeries, or as he/she had been careless and irresponsible. The investors, shareholders, creditors, banks and suppliers, who had financed these bankrupt companies, were forced to take the responsibilities for their own losses. In some cases, the auditing firms were also forced to take the responsibilities, as they mislead the people by publishing a wrong picture of the company. For instance, in 1990 the seventh largest American accounting firm, Laventhol & Horwath, filed for bankruptcy, largely due to the number of damage claims facing the firm. Two years later another large firm in USA, Panell Kerr Forster, underwent a massive restructuring of liability, closing or selling 90 percent of its offices.(Peter Walton, p.66)

Here our intention is not to find out who should take the responsibilities for such failures, but to figure out to what extent the current accounting methods have become inefficient in showing a "real picture" of a business enterprise - a picture based on objectively measured and clearly defined information describing the financial consequences of the actions of organisations. Thus the existing financial statements fail to provide the manager with relevant information to make correct decisions with financial consequences for the company. Actually the traditional accounting method was a wonderful method to obtain a "real picture" of a business enterprise, when it was invented nearly 500 years ago. At that time, the number of business activities was very small, and the amount of transactions was not large in terms of money.
Furthermore, transactions on credit or business activities such as import, export or invoicing which delayed the payments made or received were not made or at least not made as frequently as in current days.

Nowadays, the world has become one large market, where competition is tougher, and transactions take place much faster. Thus, managers are being forced to make decisions within a shorter period to exist in the industry. Therefore the current accounting methods should provide adequate data and information to take the correct decisions on the firms future strategy. In this regard, even though the current business environment has entirely changed from those days, in which the traditional accounting methods were introduced, we have been using the same old accounting concepts, principles and methods. If we look at these points in little more detail, we are able to understand how these methods mislead the users. There are several reasons for the inefficiency of the financial reporting. We identify that the problems, which are associated with financial reporting, mainly lie on the following two areas:

· The problems with defining terms
· The problems with financial statements

In the following section, we are trying to point out the lacks of the current accounting system concerning the above mentioned points.



2.2 Problems with Defining Terms

Financial statements are not conceptualised which means that the available basic terms and concepts are not defined clearly but are based on assumption, speculation and belief.
These basic concepts are useless e.g. the concepts of "assets", "liabilities" or "equity" are not understandable or are even misleading and can be misunderstood - which means will be misunderstood.
We will go a little bit more into detail with those concepts in the following sections.

2.2.1 Assets

Even though in the traditional accounting system, assets are classified into fixed assets, e.g. machines or buildings and current assets, e.g. inventory or cash, nobody really knows what an asset is. There is no precise and well defined content of the concept of assets.
One big problem in the "concept of assets" is, that there is no standard in valuing them which means that a unique asset can be valued completely different from country to country. IASC allows assets to be valued at acquisition cost or production cost though valuation above historical cost or current value is also allowed. In contrary, in the US valuation above historical cost is not allowed. The same goes for Germany as well where valuation above historical cost is not allowed. (Peter Walton, p.326)
Valuing assets based on e.g. historical costs usually means that the "book value" of the asset does not reflect its "real value", e.g. the market value.



2.2.2 Liabilities

In the current accounting system, liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. (FASB)
Liabilities are divided into current liabilities, accounts payable, taxes payable, accrued expenses, deferred revenues and current portion of long term debt but still no one understands the "concept of liabilities" because of a lacking precise and well defined content of it. (Accounting and text cases Robert N. Anthony)

2.2.3 Owners Equity

Equity or net assets is the residual interest in the assets of an entity that remains after deducting its liabilities. ( FASB )
Equity can be divided into the two categories of paid in capital and retained earnings but it still remains a concept that is only defined as the difference between two other concepts - no matter what name you give it. The concept of equity is an unrealistic concept because the amount reported as equity consists of amounts of capital from two different sources, e.g. capital by equity investors and profit by the company itself.



2.3 The Problems with Financial Statements

According to the FASB (Financial Accounting Standards Board), the purpose of the financial reporting is to provide information that is useful to the different parties such as present and potential investors, creditors and others. In practice, there are a number of interested parties such as shareholders, creditors, suppliers, banks, financial institutions, employees, managers, competitors and the government authorities, who can be interested in using these financial statements in order to decide about their future business with the particular business enterprise. The financial statements can generally be divided into three different parts:

· A profit and loss account
· A balance sheet
· A report and notes

While the profit and loss account describes the performance of an enterprise, the balance sheet describes the financial conditions of the enterprise. The report and notes consist of comments, specifications and additional details. In this regard, the financial statements should provide the perfect and trustworthy information on the firm's performance and financial conditions, but in reality, the financial statements are untrustworthy, as they contain the following draw backs. (Henning Kirkegaard, p.85)

· Static, instead of being dynamic
· Out of date, instead of being up to date
· Unclear, instead of being clear
· Incomplete, instead of being clear

In the following sections, we will give you reasons why the current financial statements don't provide their readers with "perfect" and trustworthy information and are thereby unreliable.
2.3.1 Static, Instead of Being Dynamic

The concept of periodicity refers to the fact that accountants measure cash flows over regular calendar periods, such as a year, a quarter, or a month. The key problem lies in the fact that the cash flow is generally relatively difficult to measure during the completion of a certain project. Traditional financial statements don't provide a dynamic system to survey cash flows of certain projects while they are not finished yet, e.g. the life time of certain projects usually doesn't fit into the regular financial reporting periods.
There is no reason for only being interested in and surveying the financial situation of a company in fixed and static periods of time such as a calendar year or a month. Those fixed periods of time have nothing to do with reality.


2.3.2 Out Of Date, Instead of Up To Date

The profit and loss account and the balance sheet are used to describe a past story of the company, as it contains a past period. The balance sheet is like a snapshot of a firm, and this snapshot describes how the financial conditions of this firm were at that particular moment. Financial statements can help to know only about the past story of the firm, but they can never help to show the present or predict the future performance and conditions of the company. To predict the future financial situation of a company by using traditional financial statements, you have to assume that past data can give you information about the firms future - this can not be possible in the real world as things are always changing.



2.3.3 Unclear, Instead of Being Clear

The financial statements are always very difficult to understand for a non-expert or an ordinary investor, as there are number of complicated terms and methods, which are used according to law requirements. For instance, when we calculate the value of the inventory, there are different methods such as FIFO, LIFO, HIFO, NIFO, and market value. In different situations, firms are required to use a different method. One other thing is that number of terms, which are used in accounting, have a different meaning in the real world. For instance, the word debit is based on the Latin word debitum which means some thing due to. How can be acceptable that cash in the hand or in the bank is required to enter in the debit side of the accounts. Here is a second example: How can we argue to an ordinary person that while the loans are being entered on the credits side of the account, the profits and revenues should be entered on the credit side?


2.3.4 Incomplete, Instead of Being Complete

The financial statements do not tell us about the whole story of an entity, because they only focus on the transactions or activities, which can be measured in terms of money. As it was stated earlier, there are so many activities such as invention of new technology, penetrating new markets, new strategy formulation, which can take place in the business entity. These activities can change the firms marketing and earning possibilities, but these activities are not included in the financial statements.
As we know, when we prepare the financial statements, performance and financial position of the firm are being described in terms of money. Actually there are so many subjects related to the firm's performance, which are not explainable in the money value.

If a firm, for instance, has a group of skilled employees, who can possibly lead the firm to be in the leading position, it is not possible to show that in the financial statements, as it is only described in terms of money. On the other hand, if such kind of skilled employees leave the company, it should be considered as a great loss from the company's point of view, but it is also impossible to show in the financial statements.
One more point is that some agreements a company has to fulfil are not included in the traditional financial statements, e.g. salaries to employees which have to be paid even if a company finished its activities. Such "hidden obligations" are not shown in the system which makes it incomplete.



3. New Dynamic Accounting Theory

New accounting practice should grant users of financial statements access to objectively measured and clearly defined information to give a description of the financial consequences of the operations of an organisation.
The above mentioned financial consequences can be described completely and consistently by classifying information about positive or negative payments into four logical categories i.e. adding two new measurement points which are expected and agreed to the existing realised and paid. The result will be a logical chain of events including four points of measurement which describes the transaction all the way from the expected stage up to the point when payment is made or received.

As we have explained earlier in our work traditional financial statements and accounting registration methods fail in providing us with essential information about the financial position of a company because they contain some serious defects.
The most dramatic consequences of these defects are unforeseen financial disasters leading to heavy losses for stakeholders of enterprises that seem to be perfectly "healthy" according to their financial statements but suddenly face an unexpected bankruptcy.

The dynamic accounting model is a tool that describes the payments made and received in an organisation using four points of measurement: expected, agreed, realised and paid. Thereby every transaction of an organisation is classified into a certain state in a logical chain of events from expected to paid according to it's "maturity".

This means that expectations and agreements about future payments are included in the information system. This is a major difference from the traditional accounting registration that is limited to only registering historical transactions, e.g. realised or paid transactions that already occurred.

In a dynamic accounting model, agreements that an organisation has made are included, e.g. wages that the organisation has agreed upon to pay to the people working in it. In a traditional financial statement these kind of agreements are not included even though they make an obligation for the company once they have been agreed upon. By including these kind of agreements we are closer to present a complete picture of an organisation's activities.

All transactions with financial consequences - even uncertain transactions like agreed or expected - are included already at a stage when they are first known. Combined with the information technology and data processing techniques possibilities of today it is possible to generate an up-to-date picture of a company's financial position.

The financial position of an enterprise doing business in the modern world changes all the time and by entering the transactions that have financial consequences for an organisation when these consequences are first known enables a user (e.g. a manager that wishes to make responsible decisions) to get a dynamic picture of the company's financial position that immediately reflects changes in the financial situation of a company.

When including financial consequences of expected and agreed actions one has to accept that prediction errors between the different points of measurement are likely to occur and in some cases will occur for certain.
For example, the budgeted income (expectation result) of a project is 100 Polish Zlotys. The company makes an offer and reaches an agreement on delivering the project for 95 Zlotys which results in a prediction error 5 (100 - 95) .

Prediction errors can of course occur between all the different points of measurement and can be described as:

Expectation result = Agreement result + prediction error
Agreement result = Realisation result + prediction error
Realisation result = Payment result + prediction error

Therefore it is of highest importance to immediately update the balance of payments when new information on a future payment is obtained. If we return to the example above this would mean that once an agreement to deliver the project for 95 Zlotys has been reached the value of the future payment in the information system must be changed from expected 100 to agreed 95.

Even though we have to accept a situation where prediction errors will occur between the different measurement points it is still better to have information available that a manager can act upon than facing unpleasant surprises in form of liquidity problems, or even an unexpected bankruptcy because of not having the information needed to do something about the situation.

When comparing the information that can be obtained from this kind of dynamic information system with the information of traditional company accounts it is quite clear that the information in the dynamic system is much more useful for a manager wishing to make clever financial decisions and wishing to be able to act upon things while it is still possible.

New dynamic accounting theory presented by Henning Kirkegaard does not discard the Double Entry Bookkeeping system - instead the new model is based on DEB. That is why Mr. Kirkegaard calls this an evolution into accounting instead of revolution - his suggestion for a scientifically viable accounting is as follows:

"Accounting is theories (ideas) and methods (procedures) for describing, explaining and predicting the financial consequences of the activities of an organisation."

The new dynamic accounting model helps to predict the liquidity of a company. As Henning Kirkegaard explains the concepts of profit and liquidity in an example of Rubin's Vase model where he tries to explain that either you can see the background or the two faces, which he links to the profit and liquidity. This means if you can see the profit of a company then the liquidity will be in the background and if you look at the liquidity then the profit will be in the background. So it means that we have only two choices either we can focus on the profit or on the liquidity but both are not presentable at the same time. Which can contradict the real life. In the real life knowing the profit and liquidity are both very important for the stakeholders.

Now we will come to the brief distinction between a company's state of solvency and liquidity. There are four situations, a company can be in with respect to the liquidity of that company.

1. Solvent and liquid
This is a situation where a company is able to pay all its credits and claims. Companies in this stage are normally doing fine and they are not noticed in the media and in the eyes of their creditors as well.

2. Solvent and illiquid
This is a stage where a company is temporarily unable to pay its creditors. This means that company is liquid for a short period of time. But the company is solvent in the long run. Presently, many companies can't survey their current liquidity and are forced to deal with temporary illiquidity. This is one situation where dynamic accounting or if we call it liquidity accounting comes into existence.
If a company can get an early warning before getting to this stage of solvent and illiquid, it can be golden information for that enterprise. Action can be taken in time to solve the temporary illiquidity problem.

3. Insolvent and liquid
This is a stage where a company is able to pay its debts in the short run. But their debts in the longer run are larger than their assets. Companies in this stage are temporarily able to pay its creditors. Companies in this stage have very less chances to survive. Coming to the Dynamic accounting model, if a company in this situation get an early warning of permanent insolvency, and the company can be liquidated as fast as possible to prevent further damage for its creditors.

4. Insolvent and illiquid
Enterprises in this stage cannot pay their bills temporarily nor in the longer run. Instead their debts are much larger than their assets. The firms in this stage end up in bankruptcy.

After having described the current accounting system in the first part, having analysed its problems in the second part and having presented you a new dynamic accounting model in theory to overcome these problems in the third part, we will describe the implementation of the new model in a software solution and analyse how it works out in the real world in the following chapter.



4. Description of the LogiCase Model


4.1 Introduction and Tasks of the LogiCase Model

The LogiCase system is a software solution based on the new dynamic accounting model and is produced by a small Danish firm called SEFF Systems A/S. This company is located in Farum, north of Copenhagen. The aim of the Logicase Model is to

· Create a basis for management decisions, which is always updated with the latest information available in the entire organisation.
· Create a reliable and trustworthy prognosis of future liquidity.
· Create reports and charts for profitability surveillance on all levels where it is demanded.
· Create an early warning system on the organisation's ability to meet all financial obligations.

In practise, a tool like this must

· Be usable by users with no accounting skills - i.e. offer a friendly and intuitive user interface
· Provide useful information to the users feeding information into the system
· Be capable to produce the traditional financial statements
· Live up to existing accounting standards and integrity
· Flawlessly interface with existing financial systems



4.2 Implementation


4.2.1 Registering Data

All decisions having financial consequences now or in the future are entered into the system whenever and wherever they are first known and have an amount attached to them. The financial transactions which occur in the organisation are entered in their logical sequence e.g. the four points of measurement:

· Offers, expectations etc.
· Contracts, orders, agreements etc.
· Invoices received or issued
· Money received or paid

Basically, after entering the amount and the stage of the transaction as mentioned above, the user finalises the set of data by entering the date when the payment is expected to take place. This data has to be entered only once - there is no need to enter a "counterbooking" for each of the transactions like in DEB. This "feature" of checking transactions within DEB was very useful in the times where no modern information technology was available to avoid human beings to make errors in counting numbers - computers don't make errors like these. Therefore, redundant information like double-entries can be avoided.



4.2.2 Structuring Using Cases

For implementing this system the model divides all transactions into six categories, which are called base-cases to build up the framework. Each of these cases can have an unlimited number of sub-cases, depending on the business of the company using the model. The sub-cases are called case-types and allow to get more into detail of the company. These case-types can be changed by an authorised person if necessary e.g. something in the business structure changes. This arrangement of accounts grants a structured, modularised and organised branch-like structure. All case-types are given new systematic numbers. If necessary, the DEB account numbers are additionally assigned in order to be able to let the system produce the traditional financial statements required by law. See also chapter 4.3.2, generation of the traditional financial statements.

The base-cases are:
1. Projects
2. Income/Earnings
3. Expenses
4. Investments
5. Financing
6. Taxes and duties

These base-cases are fixed and don't have to be changed, whereas the case-types within the base-cases are dynamic and vary from company to company depending on the structure of the firm and its business.


Here is an example of how the first branch of the cases could be structured for a company in the film-industry.

1. Projects
Projects are the core-business of the company.
1.1 Movies
1.2 TV-fiction
1.3 Documentary films
1.4 Commercials

2. Income/Earnings
All payments from other than core-activities received or receivable belong into this category e.g.
2.1 Equipment renting
2.2 Consulting fees
2.3 Miscellaneous income

3. Expenses
All expenses from other than core-activities paid or payable belong into this category e.g.
3.1 Rent
3.2 Salaries
3.3 Office expenses
3.4 Marketing

4. Investments
4.1 Buildings
4.2 Company cars
4.3 IT- systems
4.4 Investments in other companies


5. Financing
5.1 Share capital
5.2 Bank loans
5.3 Liabilities

6. Taxes and duties
6.1 Income tax
6.2 Value added tax
6.3 Import duties


4.3 Features of LogiCase and Use of the Data


4.3.1 Liquidity Prediction

After the financial consequences are registered into the system with a payment date it is possible to generate real time pictures of the company's liquidity. The company's liquidity can be viewed separated by single projects, group of projects and it is also possible to view the total liquidity with all projects included. Additionally, it is also possible to distinguish between the logical chain of events for every decision to see an overall picture with all events included.
This liquidity prediction provides the company with an early warning system capable of identifying financial situations of being in danger of illiquidity. Because all information is included - not only information concerning realisation and payment like in DEB but also expectations and agreements - unpleasant surprises in form of running out of funds can be avoided and action can be taken in time to overcome this temporary lack of money. Above mentioned actions could be e.g. taking short-term loans, postponement of payments or investments and receiving payments in advance. Obtaining such information and being able to react in advance is vital and of greatest importance for a company.
This system allows you to "simulate" best-case and worst-case scenarios and all states in between not only for projects but also for possible outcomes of different management decisions. We assume all expected, agreed and realised projects to be fully paid in the best-case scenario considering projects. This means that there are no prediction errors between the different points of measurement. Similarly the worst-case scenario concerning projects analyses the situation where none of the expected, agreed and realised projects will be paid - the prediction error is highest. Even though those extremes are very unlikely, they provide the user with a "corridor" having all other states in between.
In addition, possible outcomes of different management decisions to avoid liquidity problems can be analysed.

In general, you have the following outcomes:

· n expected projects; n will not be paid (worst case scenario)
· n expected projects; n-m will not be paid; m<n (scenario in between)
· n expected projects; 0 will not be paid (best case scenario)

First, you analyse scenarios you are interested in. If there occurs a lack of liquidity, you can analyse the different possible opportunities to handle the situation.


Example of a company's liquidity profile. Note the horizontal line in the graphs shows the present day.


Figure 1
Only realised and paid transactions are included in this profile which means the information you gain from this liquidity profile can also be obtained from the financial statements of the DEB. Note that there is also a possible error in prediction because realised transactions are not certain. No problem in the company's liquidity is visible.



Figure 2
Now all the agreed transactions are included as well which makes the picture of the company's financial situation more complete but still, there is no problem visible.
Note that the prediction error is slightly higher.



Figure 3
Now all the available information about present and future transactions is included. Obviously, the possible error in prediction might be at its highest but now a possible lack of liquidity (in this example in the period 14 to 17) can be detected and action can be taken in time.

4.3.2 Generation of Traditional Financial Statements

The LogiCase system produces a dynamic balance sheet including expected, agreed, realised and paid projects. This balance sheet is more or less a balance of payments, like a trade balance showing the net result of the positive or negative cash flows in a company at a certain moment. Despite of this it is not only a tool for internal management decisions but also enables the user to extract the data needed for producing the traditional financial statements like the traditional balance sheet and the tax calculations. That is why each of the transactions are given two separate account numbers - just as described earlier in this chapter - one for the internal system and one for the financial accounting (traditional reporting) purposes if necessary. Every time a transaction moves from the stage agreed to realised it will automatically get an account number belonging to the traditional bookkeeping system and is thereby recorded in the official financial accounts.
4.3.3 Tool for Financing and Investing

The LogiCase systems provides a future liquidity profile of the company which means that if we have extra liquidity at a certain time in the future, this liquidity can be used for investment purposes giving you opportunity benefits because the extra liquidity can be invested whenever possible. The liquidity profile can also tell you the time-period that the money can be held in those investments. When considering how to finance investments the liquidity profile shows you whether it is possible to finance the investment with the extra liquidity or if external capital is needed.


4.3.4 Dynamic Control of Payments

An additional feature of the LogiCase model is the ability to overview your payments when they fall due but have not been paid yet. An authorised person receives a signal that a payment has not been paid or received yet and certain action can be taken to tackle this. We consider this to be a very smart feature to attain permanent control of current payments.


4.4 Requirements, Environment and Comments


4.4.1 Interpretation of Data

Interpretation of prediction data can be possible source of errors => time-lag. Human can make errors in interpreting the data. Interpretation of data is something, which you learn by time and experience. More experienced people can make better predictions.


4.4.2 Inclusion of All Data

All information in all four stages of expected, agreed, realised and paid relating to financial consequences should be entered in order to get a complete and reliable picture of the company's liquidity.


4.4.3 Accounting Department

A well functioning accounting department is required which means that people in the accounting department are well prepared and well educated. They are well informed with latest information technology, since IT is a prerequisite of this system. It is also important that communication inside the department is well functioning. While we talk about the well functioning, that every one who is using this system is well aware of the system and knows how to enter the data and how to retrieve the data as well.


4.4.4 Entering Wrong Data

Control needed hardly to prevent misuse of the system, which is open-structured where, wrong information entries possible. Different people can update or acquire data differently. It is always possible to manipulate with any system or it may also be a wrong doing. If some wrong information is entered it will give the wrong liquidity profile. In order to get a up to date liquidity it is necessary data entered is correct.


4.4.5 Training

Since the system is dependent on new information technology and new as well, it is necessary that people are trained before they start using this system.
A very small error in data entry can create a huge chaos e.g. if a payment is delayed and it is not corrected in the system. Companies using the system should establish rules about how and when to enter data. Support and education within company very time-intensive and costly. New "philosophy" has to be adopted to make the system work in practise


4.4.6 Is Dynamic Accounting the Perfect Solution?

Dynamic accounting system can never be a "perfect" system and is always an attempt to gain a useful tool for management decisions in practise!
There is no method, which can help us to predict future exactly but the dynamic accounting model helps us to predict the firms future liquidity more precisely than the traditional accounting method does.
It is usual that there are more possibilities for prediction errors to occur when we try to predict for longer periods than for shorter periods.




4.4.7 Size of the Company

One of the drawbacks of the system could be since it is costly to implement and it requires training programs, the benefits compared to costs are not big enough for smaller companies. There could be another argument that smaller companies just don't need this system because they have an overall control over the company ´s liquidity matters. While it is good for larger companies because their operation are more complex.


4.4.8 Valuing Fixed Assets

The way you value fixed assets in the current accounting system is to use certain book values and use historical cost price as described earlier in our project. According to Mr. Henning Kirkegaard, information like this should not be included in a dynamic accounting system because "this type of information is not the same as a prediction of payments".
Mr. John Eskebaek includes this information in the LogiCase system by arguing that the uncertainty of future cash flows can be reduced because fixed assets (for example: machinery) is valued in terms of expectations. For example, if you buy a new machine, it will increase your production capacity and can therefore reduce the uncertainty about the possibility that a certain project can be realised. This reduction of uncertainty can lead to a possible gain because the budgeting will be therefore more exact and the production capacity can be almost fully used. Certainly, a situation (an asset) like this can have an effect on future cash flows of the company and has to be included.


4.4.9 Discounting of Cash Flows?

Obviously, no discounting of cash flows is needed because present values are unnecessary in this model - only cash flows in future points of time are relevant. You don't have to calculate the cost of capital to determine the present values, which can be a hard task and a source for errors.


4.4.10 Possible Danger

A last thing to mention about the dynamic accounting system is a very general one. Let's imagine, someone decides to take an action with financial consequences because he analysed a possible liquidity problem. Unfortunately, this action can result in a relatively small loss - compared to a state resulting of not doing anything. For example, let's imagine a credit was taken to overcome a temporary illiquidity. It can possibly turn out that this credit will not have to be used which will result in a net loss
still better that having to face the full consequences of a sudden illiquidity => "hedging" within company -> short-term prediction (3-4 months) reliable



5. Conclusion and Future Perspective

In order to give a solution to the problems of current accounting practices we have tried to give a tentative solution which is the dynamic accounting model, a tool that describes the payments made and received in an organisation using four points of measurement: expected, agreed, realised and paid. New dynamic accounting theory presented by Mr. Henning Kirkegaard does not discard the double entry bookkeeping system, instead the new model is based on Double Entry Bookkeeping that is why Kirkegaard calls this an evolution into accounting instead of revolution. Thereby every transaction of an organisation is classified into a certain state in a logical chain of events from expected to paid according to it's "maturity". The expectations and agreements about future payments are included in the information system. This is a major difference from the traditional accounting registration that is limited to only registering historical transactions.
All transactions with financial consequences - even uncertain transactions like agreed or expected - are included already at a stage when they are first known. Combined with the information technology and data processing techniques possibilities of today it is possible to generate an up-to-date picture of a company's financial position.

Even though we have to accept a situation where prediction errors will occur between the different measurement points it is still better to have information available that a manager can act upon than facing unpleasant surprises in form of liquidity problems, or even an unexpected bankruptcy because of not having the information needed to do something about the situation.

Before ending our discussion we would like to conclude that there is a difference of approach concerning assets and liabilities between the traditional accounting model and the dynamic one. In the traditional model the assets and liabilities are used to determine profits while the assets and liabilities defined in the dynamic system are used for liquidity purposes at least for now.
The other difference we could see is that traditional definitions are past oriented while in the dynamic model the focus is on future perspectives. Tangible assets e.g. property, plant and equipment are not recognised as assets in the dynamic model because once these assets are purchased they are treated as an expense and afterwards there is no depreciation allowed on tangible assets in dynamic accounting. Depreciating the value of an asset does not increase the liquidity but of course it can decrease the profitable income of a company. But in the dynamic accounting the focus is not decreasing the taxable income instead giving a true and fair picture of the company's the accounts and of course the liquidity. . While in the equity part there are not much differences between two models.
We will end up our discussion with the following points which are still need to be answered and future research is needed to explain the future more precisely and decreasing the prediction errors.

· There is no method, which can help us to predict future exactly but the dynamic accounting model helps us to predict the firms future liquidity more precisely than the traditional accounting method does.
· It is usual that there are more possibilities for prediction errors to occur when we try to predict for longer periods than for shorter periods.

We would like to repeat the example of Rubin's Vase, where it was argued that only one part of the picture can be seen at one time, we would say that it is a matter of choice now which part of the picture we want to focus on.




List of References

1. Henning Kirkegaard: Improving Accounting Reliablility, Quorom Books, London1997.
2. FASB: Statement of Finacial Accounting Concepts,John Wiley & Sons Inc
1998/99.
3. Robert N. Anthony: Accounting Text and Cases, McGraw Hill, 1999.
4. Peter Walton: International Accounting, International Thomson Business Press, 1998.
5. Material from the interview with John Eskebaek and Søren Ølund, SEFF Systems A/S, Farum