Great question! I certainly understand the desire from the business to 'get to a better answer'. Oftentimes, the initial ask is that any change that is made to numbers or a model be made in the past as well as into the future. After all, isn't the issue that we want to keep the numbers on the same basis?
Pros to the approach of historical changes:
- Modeling and allocation approaches are consistent throughout time.
- Numbers are shown consistently
- Financial trends appear more useful
- Corrects prior 'inaccuracies' in a way that can be perceived as more understandable.
Cons to the approach of historical changes:
- Models and allocation approaches mature over time. The maturation process is completely normal and explanations (footnotes) can help report users understand the maturation of the approach.
- Business changes are made over time; for instance, cost centers change as managers' responsibilities change
- Are these considered to be historical changes. How do future changes and/or corrections get made for historical financial information, which simply was very different than what is in place today?
- Oftentimes, historical information is not always available when new data has been identified as available today.
- How can the model reflect information that was missing? For instance, server numbers and/or application names, etc change over time. The information is as of a point in time and not relevant outside of that point in time.
- To assure accuracy, numbers must be re-checked. For instance, cost source information was quality checked during a month-end close; however, changes have now been made. The historical checks must be made for every month which is now well into the past.
- Managers signed off on those financial statements and may even have been awarded compensation and/or awards for those results. The 'new' approach may result in a different outcome. How will this be handled?
- Now managers will need to check not only this month's changes, but go back in time and check all prior months, as well. Finding time to do this may be difficult.
- Due to the difficulties presented with making historical changes, folks may be hesitant to mention that a change is needed and the process may become stagnant.
If an historical view is desirable,my preference is to make the change in the 'active' model today and going forward. No change to historical months - these are closed. If the impact of the change is needed, create a snapshot and make the change in all historical months and determine what the historical impact might have been. Explain the changes and financial impact in a footnote. I recommend explaining that this is a model and over time we can expect maturation and better understanding to occur; however, the historical information is closed and not subject to change.
If a true error is found and it is determined that the error needs to be corrected, then an historical approach may be warranted. For instance, it is found that a cost center has been missing from the beginning of the year, then an historical change is warranted and the extra effort to assure all costs are part of the equation is needed.
To alleviate cost concerns, it may be nice to review the pricing on a quarterly, semi annual or annual basis. If it is found that pricing was too high, it may be wise to review the over recovery at the end of the year and provide a 'rebate' to business units, if a rebate is warranted. If IT services were under priced; instead of a rebate, the business units would see an additional charge. Ideally, the prices would be found to be within a reasonable range and no rebate nor additional charge would be necessary.
Sorry for the verbose response. Please, let me know if additional information is needed.