Should organizational financial information be differentiated between Information used for Financial Reporting and Information used for Internal Decision Support? Sometimes they are the same and sometimes they are quite different.
The difference is:
- financial information for financial reporting must comply with Generally Accepted Accounting Principles and the rules of Financial Reporting Standard Setters.
- financial information for internal decision support must reflect the resources, processes, and economics of the organization. The only principle is "causality" - reflecting the cause-and-effect relationships of the resources and processes.
Some years ago, IMA published a Statement of Management Accounting titled A Conceptual Framework for Managerial Costing that made this differentiation and set forth the principles for financial internal decision support information. That SMA was followed by several others that delved into a number of topics around internal decision support financial information.
Internal decision support information needs to look beyond financial reporting standards and represent the reality and causal relationships of operating for the long term. In addition to many IMA resources another book which tells the story of internal decision is "Profitable Expectations" by Doug Hicks. It is written as a novel but shows the evolution of a controller from financial reporting focus to an internal decision support focus. The Profitability Analytics Center of Excellence also has many articles, blogs and e-books on financial information for internal decision support.
How many of you have recognized and applied this difference in your your companies? What improvements have been made? What challenges did you face?
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Larry White CMA,CFM,CSCA
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