What is a position paper?

“Position paper” seems to be a buzz word in the accounting world – and for good reasons. Position papers perform an essential role in the audit process. In our experience, most fast-growing tech companies will have to draft several. Sometimes position papers are written as part of the (first) annual audit, while other companies write position papers to prepare for investment due diligence (DD) processes. 

When are position papers used and how to write a position paper? That is what we discuss today.

Application

Position papers are often used for accounts that are considered complex, risky or otherwise ‘arguable’, including:

• Capitalization of development costs (see below for an example)

• Recognition of Deferred Tax Assets (DTA) regarding loss carry-overs

• Valuation of stock option plan / stock appreciation rights (SAR)

• Revenue recognition criteria and revenue controls (regarding completeness, accuracy, timing)

• Application of lease accounting

Contents

Position papers are mostly used with regard to complex or arguable accounts. A position paper will generally discuss the following topics:

1. Identification – to what account(s) is the paper related?

2. Related accounting principles – for example, links to Dutch GAAP or IFRS standards.

3. Interpretations and estimations – the most important aspect of a position paper is to provide a well-argued position regarding the choice of management estimations. Refer to the example below for more information.

4. Accounting consequences – how does the argued position relate to accounting procedures?

Length doesn’t count. In fact, we prefer short and concise. However, for the more complicated topics, a certain amount of substance may be required. Generally, position papers will be 2-3 to up to 10 pages long, depending on the amount of data and references.

How to write a position paper?

The process will differ based on the organization and account. In any case, we’d be happy to provide you with a more specific template. While we’d be happy to write your position papers, generally, position papers can be written by the finance team. The following steps might help:

• Summarize accounting principles regarding the specified account (for Dutch GAAP this can be based on the RJ, for IFRS refer to IAS/IFRS rules)

• Identify the related GL accounts

• Describe the calculation method(s) and explain any assumptions and estimations

• Explain why these assumptions and estimations should be considered reasonable

• Conclusion

Example: IFA

Most our clients develop software internally. Generally, these costs should be capitalized and amortized over a given time period (matching principle). In short, there are three ‘parameters’ to consider – all three show the value of a position paper:

• Identification of costs – for IFA, generally the labor cost and directly attributable overhead costs are considered. The position paper should describe these costs and should discuss why this selection is the most appropriate.

• The distinction between new developments and maintaining/bug fixing the application – only new developments should be capitalized. Especially when working with a scrum/devops approach, it’ll be hard to identify what is ‘new’ and what is ‘maintenance’. Difficult, but required… In our experience, many options are available, including the use of tickets/issues, output of scrum sessions, commits / repository analysis, etc. The position paper should describe the chosen method and why this is the appropriate method.

• Depreciation period – the depreciation period of software is, by definition, an estimate. It requires both professional judgment and factual data (for example market reports about the expected lifetime of an Android app). The position paper will describe what data sources are used and how the prudence principle is considered in this estimation.

The benefits

For all three parameters, the value of a position paper is twofold:

• Think, once – a priori, a position paper should be future proof. Therefore, a clear position paper is an investment in the audit efficiency in the next years – and in any (un)expected DD’s as well.

• Communication – In fast-growing organizations, (finance) teams tend to grow and change. Position papers provide clear communication over the years and therefore results in efficiency and consistency. Furthermore, the position paper provides a clear starting point for discussions with your financial auditor, eliminating unnecessary long meetings, notes, and calls.

Clearly: position papers are an important responsibility of the finance team and a valuable tool in the efficiency of financial reporting and Due Diligence processes. If you’re not convinced, consider this: the positive ROI of a position paper will be most clearly visible in the efficiency of the annual audit. Resulting in a lower audit fee and a smoother process. Isn’t that what we all want to accomplish?