Purpose
Turn a raw period-over-period balance change into a clear, defensible variance narrative that names the driver, quantifies the movement, and reads the way management and auditors expect flux commentary to read. Eliminates the blank-cell problem in the flux template and prevents vague explanations like "timing" that trigger auditor follow-ups.
When to Use
Invoke this skill when the user asks to:
- Explain a variance or flux between two periods for a specific account
- Write flux narrative commentary for a month-end or quarter-end close package
- Explain why a balance sheet or income statement account moved
- Draft management commentary on account movements for reporting
- Respond to an auditor's question about a period-over-period change
- Prepare MD&A-style or close-review variance write-ups
Inputs Required
Before starting, collect:
- Account name: The GL account or line item being explained
- Account type: Balance sheet or income statement (and asset/liability/equity/revenue/expense if known)
- Prior balance: The comparison-period figure (with period label, e.g., "Q2" or "prior month")
- Current balance: The current-period figure (with period label)
- Context notes: What the accountant knows — transactions, accruals, reclasses, one-time items, business events, seasonality
- Audience: Internal management review / external auditor support / MD&A disclosure
- Materiality threshold: The dollar or percentage level above which an explanation is required (optional)
If materiality threshold is missing, flag variances over 10% or a stated dollar amount and note the assumption. If account type is missing, infer it from the account name and state the inference.
Instructions
Step 1: Quantify the Variance
Compute and state the movement precisely before explaining it.
- Absolute change: Current − Prior (state as increase or decrease, with sign)
- Percentage change: (Current − Prior) / |Prior|, expressed to one decimal
- Directional label: Favorable / Unfavorable relative to the account's normal expectation (e.g., higher expense = unfavorable; higher revenue = favorable)
- Materiality flag: State whether the variance exceeds the threshold and therefore requires commentary
- Handle edge cases: if prior balance is zero, describe as "new balance" rather than computing an infinite percentage; if the account crossed zero (debit to credit or vice versa), call that out explicitly
Step 2: Isolate the Primary Driver
Attribute the movement to its cause using the context notes. Classify the driver into one of these categories:
- Volume/activity change: More or fewer transactions, units, headcount, or business activity
- Rate/price change: Same volume, different price, rate, or cost per unit
- Timing: Accrual, prepayment, cutoff, or a transaction that shifted between periods — must specify what shifted and why
- One-time/non-recurring item: A discrete event (settlement, write-off, true-up, impairment, gain/loss on disposal)
- Reclassification/correction: Balance moved between accounts or an error was fixed
- Seasonality: Expected periodic pattern
- Estimate revision: Change in reserve, allowance, valuation, or accrual estimate
If the context supports multiple drivers, decompose the total variance into components and quantify each where possible (e.g., "$120K increase = $90K new hires + $30K annual merit increases").
Step 3: Write the Variance Narrative
Compose the explanation in the standard flux format:
- Lead with the movement: State the dollar and percentage change and direction in the first sentence.
- Name the driver: Attribute the change to the specific cause — never leave it at "timing" or "various."
- Quantify the components: Break the total into its contributing pieces where the context allows.
- Note recurrence: State whether the driver is expected to recur or reverse in future periods.
- Cross-reference support: Where relevant, reference the underlying source (journal entry, invoice, contract, accrual schedule) that substantiates the explanation.
Match the register to the audience: tighter and more technical for auditors, plainer and more business-oriented for management.
Step 4: Flag Gaps and Follow-Ups
Identify anything that would weaken the narrative or invite a challenge:
- Unexplained residual: If the named drivers don't fully account for the variance, state the unexplained amount and recommend investigation
- Insufficient context: If the notes don't support a specific driver, produce the best available explanation and list the exact question to resolve it
- Audit-risk phrasing: Rewrite any explanation that relies on vague terms ("miscellaneous," "general increase") into a specific, substantiated statement
Output Format
- Structure: A quantified variance summary block, followed by the finished narrative paragraph, followed by a driver breakdown and any follow-up flags
- Length: 150–300 words per account (narrative itself 2–5 sentences)
- Format: Structured document — summary as labeled figures, narrative as prose, breakdown as bullets
- Sections: Variance Summary (change $, change %, direction, materiality) → Variance Narrative → Driver Breakdown → Follow-Ups & Gaps
- Tone: Corporate accounting — precise, factual, audit-defensible; no hedging, no filler adjectives, quantified wherever possible
Quality Checklist
Before delivering output, verify:
- [ ] Dollar change and percentage change are both computed and stated (recompute to confirm the math)
- [ ] The direction is labeled favorable or unfavorable relative to the account's normal expectation
- [ ] The narrative names a specific driver — not "timing" or "various" alone
- [ ] Multi-driver variances are decomposed into quantified components that sum to the total (or the residual is disclosed)
- [ ] Recurrence (recurring vs. one-time / reversing) is stated
- [ ] Any explanation gap or unsubstantiated claim is flagged with the specific question needed to close it
Notes
- The single most common weakness in flux narratives is attributing a movement to "timing" without saying what shifted and why — always force specificity there
- When the context notes are thin, produce the strongest defensible explanation available and surface the missing detail as a follow-up rather than inventing a driver
- For auditor-facing narratives, favor explanations that point to substantiating support (JE number, accrual schedule, contract) — an explanation an auditor can trace is worth more than an eloquent one
- When explaining income statement accounts, prefer decomposing into volume vs. rate; for balance sheet accounts, prefer explaining the net of additions and reductions during the period
How to use this skill
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