How do you reconcile and adjust variances between different accounting systems or reports?

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Variance analysis is a technique that compares the actual performance of a business with its expected or planned performance. It helps managers and accountants identify the causes and effects of deviations from the budget, and take corrective actions if needed. In this article, you will learn how to reconcile and adjust variances between different accounting systems or reports, and why it is important to do so.

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1 Why reconcile variances?

Reconciling variances means comparing and explaining the differences between two or more sets of financial data, such as income statements, balance sheets, or cash flow statements. It is essential to reconcile variances for several reasons. First, it ensures the accuracy and reliability of the accounting information, and prevents errors or fraud. Second, it allows for consistent and meaningful analysis and reporting of the financial performance and position of the business. Third, it helps identify and resolve any issues or problems that may affect the operations or profitability of the business.

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Hogan Nymberg
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Focusing on reason 2 & 3. Variance analysis (BVA) compares actual results to plan and explains the variances. Best-case scenario reaffirms the plan and that the company is tracking. In most cases, it will direct you to an area that needs mitigation to get the company back on plan. In some cases, when actuals are significantly off budget, something is wrong. You have to investigate as to why. It may be that underlying assumptions have changed significantly. There could be forecast error, as budget was overly optimistic or conservative. The competitive landscape has changed, or innovation may have rendered a product line obsolete. A senior executive used to say, IBM typewriters best revenue year, was two years before it was obsolete.

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2 How to reconcile variances?

Reconciling variances requires an understanding of the type and source of the variance, as well as the accounting system or report being used. Generally, the process involves identifying the variances and their causes, such as changes in prices, volumes, costs, revenues, exchange rates, or accounting policies. Then you should quantify the variances and their impacts, such as how they affect gross margin, net income, cash flow, or equity. You must adjust the variances and their effects by making a journal entry, reclassification, restatement, or disclosure in the financial statements. Lastly, document and communicate the variances and their resolutions to explain them in a note, report, memo, or meeting.

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3 What are some common sources of variances?

Reconciliation and adjustment of variances may be necessary due to different accounting standards, methods, periods, or units. For instance, a business may use GAAP for external reporting and IFRS for internal reporting, FIFO or LIFO for inventory valuation, straight-line or declining balance for depreciation, monthly, quarterly, or annually for reports, and spot rate or average rate for foreign exchange. These differences can lead to discrepancies in the recognition, measurement, presentation, disclosure, cost, value, expense, timing, amount, classification, conversion, translation, or adjustment of financial items.

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4 What are some best practices for reconciling variances?

When reconciling variances, there are some best practices to follow. Using a standard and consistent format, such as a template, checklist, or software tool, is important for comparing and explaining variances. Additionally, you should use a clear and logical hierarchy and order when reconciling variances, such as starting with the highest level of aggregation or the most significant and material variances. Furthermore, it is important to use a sufficient and appropriate level of detail and documentation when reconciling variances. This includes providing enough information and evidence to support and justify the variances and their adjustments. Lastly, an effective communication and feedback mechanism should be used for reconciling variances. This includes communicating the variances and their resolutions to relevant stakeholders and seeking their input or approval if necessary.

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Eugene Moorcroft

Chief Financial Officer at Servicon Systems, Inc.
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In my experience it is helpful to set or determine an expectation for an account balance before reconciling. If the balance is way off, then I know I need to pay extra care in reconciling. Additionally, one can perform a substantive analytical procedure to derive the account balance expectation, by using operational data. If the balance is off more than a certain threshold, it means to dig further. A benefit of this process is that you gain better understanding of business activities.

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5 How to avoid or minimize variances?

In order to avoid or minimize variances, it is essential to plan and budget carefully and realistically, as well as monitor and control the actual performance and results of the business. To do so, reliable and relevant data and assumptions should be used for planning and budgeting. This includes historical data, industry benchmarks, market trends, or expert opinions to estimate prices, volumes, costs, revenues, or other financial variables. Additionally, plans and budgets should be flexible and adaptable to accommodate changes and uncertainties. For instance, scenarios, ranges, or contingencies should be used to account for any possible variations or risks that may affect the actual performance or results of the business. Furthermore, regular and frequent reviews and updates of the plans and budgets are necessary. This can be done on a monthly, quarterly, or annual basis in order to compare the actual performance or results with the planned or budgeted performance or results, as well as make any necessary adjustments or corrections.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Wendy Issa, CPA, CGA

Senior Business Analyst at University Health Network
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One thing that I find helpful is that at the time of the budget, we should identify any potential risk of achieving our target and also list any mitigation strategies. Thanks

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How do you reconcile and adjust variances between different accounting systems or reports?

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1 Why reconcile variances?

2 How to reconcile variances?

3 What are some common sources of variances?

4 What are some best practices for reconciling variances?

5 How to avoid or minimize variances?

6 Here’s what else to consider

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