Innovation in Financial Reporting

By: Jeremy Michael, CPA, Manager Assurance Services, Jeremy.Michael@BCGCompany.com

Something similar to manufacturing innovation is occurring across the globe in how businesses are reporting financial results. This innovation in financial reporting is called International Financial Reporting Standards or IFRS.

Before IFRS, each country had its own basis of accounting, similar to the United States Generally Accepted Accounting Principles (GAAP), that differed greatly from one another. This caused businesses to record similar transactions differently; thereby, creating a need for a comprehensive set of accounting standards that could be adopted worldwide. The answer to that need is IFRS.

IFRS seeks consistency in the way businesses account for transactions amongst the countries that have adopted IFRS, creating financial reporting comparability. Although there is no firm timeline on whether IFRS will replace GAAP in the United States, one thing for certain is that the world is continuing to shrink and more businesses are conducting business internationally.  Therefore, it is inevitable that U.S. manufacturers will run across IFRS in some form while conducting business, especially considering that there are over 100 countries now using IFRS and it has just landed on the shores of North America. Canada is now using this new basis of accounting in 2011 and Mexico plans to go live in 2012.  

Since it is estimated that there are approximately 30 to 300+ differences between GAAP and IFRS, I intend only to focus on three of the major differences that will impact manufacturers.

Property, Plant & Equipment –

Under IFRS, fixed assets are required to be broken out into their individual components and then depreciated over each component’s useful life; whereas under GAAP, the total cost of the asset could be capitalized and depreciated over the main useful life. 

A good example of this concept could be made with a heavy duty stamping press: capitalizing and depreciating by breaking out the main components such as the main press (15 years), computer hardware (5 years), software (3 years), the hydraulic mule (7 years), and so on. Also under IFRS, a company can elect to record their assets on fair market value as long as it can be measured reliably and at regular intervals. Once you elect this option, it has to be applied for the entire class of assets versus an individual asset.

Revenue Recognition –

Under GAAP, revenue is recognized once persuasive evidence of an arrangement exists, delivery has occurred or the service has been rendered, the price is fixed or determinable and collectability is reasonably assured. Under IFRS, revenue should not be recognized until the risks and rewards of ownership have been transferred to the buyer, the seller has no more obligations such as managerial involvement or effective control, revenue can be reliably measured and it is probable that the economic benefits will flow to the company. 

To illustrate the differences, let’s take a manufacturer who sells a product with a special promotion, a six month deferred payment option and a five year warranty, all for $5,000. Under GAAP, the sale would be recorded once the product has been delivered to the customer for the full $5,000. Under IFRS, the value of each component needs to be split out to each component such as the sales price, the deferred payment option and the five year warranty. For the sake of argument let’s say the value of the warranty is $100 a year and the interest option is valued at $50 a month; therefore, the cash sale price on day one is only $4,200 under IFRS vs. $5,000 under GAAP. The remaining revenue under IFRS would be recognized over the period as time elapses.

Inventory –

Under IFRS, inventory is valued at its net realizable value versus GAAP’s lower of cost or market value.  Net realizable value is defined as the selling price expected to be achieved (market) less an estimate of the cost to complete the production of the finished good and an estimate of the cost to be incurred to make the sale. If by chance under IFRS, inventory is written down due to an NRV issue that in a later period is no longer an issue, it is permissible to reverse the original write down. Also under IFRS, inventory is not allowed to be valued on the last in, first out (LIFO) costing method. 

Here at BCG & Company we are committed to following the innovation in financial reporting along with keeping you informed of the recent developments with IFRS. If you are interested, feel free to check out and subscribe to our ‘Where in the World is IFRS?’ blog.

Until next time, think big…think global!

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impactmanufacturing, March 28th 2011 | Tags: , ,
Posted in Economy, Globalization, Innovation

Globalization Benefits U.S. Manufacturing In Multiple Ways

By Jason Tuma

Globalization. Outsourcing. Off shoring. These words have joined “religion” and “politics” as subjects to avoid in polite conversation. It seems everyone has an opinion about whether U.S. companies doing business overseas has been beneficial or harmful to U.S. manufacturers and manufacturing workers.

Really, both are true.

Companies such as Lincoln Electric and Caterpillar have increased revenue and market share by locating plants overseas and either selling finished goods to local markets or shipping components to another company plant for assembly into final products. Both of these companies — and many others — have maintained significant operations in the U.S. while growing overseas and have reinvested profits from resulting efficiencies back into U.S. operations. This model ultimately benefits U.S. manufacturing, although restructuring (i.e., plant closings or job reductions) is sometimes a necessary part of creating an efficient and profitable global company. From a long-term perspective, however, smart global expansion makes companies stronger and positions them to create more jobs everywhere they do business.

“What happens is, globalization creates competition,” explains William Sinn, a Hong Kong-born U.S. citizen and owner of Sinn & Companies, which helps businesses tap into China as a purchasing resource, manufacturing base and marketing destination. “When there is more competition, there will be more choices for the customer. The company will need to do better in order to be able to keep the customer. It will force companies to develop better processes, or to invent better material, or to design new products to serve the customer. Ultimately they need to add more value to serve the same customer.”

Sinn gives the U.S. auto industry as an example of an industry that chose not to adjust as competitors such as Honda and Toyota embraced globalization. And while the recent “rightsizing” of U.S. auto companies has certainly been traumatic to displaced workers, there is universal consensus that the leaner reincarnations of Ford, GM and Chrysler will be stronger and have greater potential for long-term survival.

Another globalization-related mistake made by U.S. auto companies — and other manufacturers — was to use newly accessible markets such as Mexico in the 1990s and China in the early 2000s to chase low-cost supplier opportunities based solely on per-unit cost. Even in cases where these companies maintained relationships with U.S.-based suppliers, they used the threat of plentiful and cheap overseas labor to excessively beat down these long-standing suppliers on price. Many business leaders now recognize that this model eventually backfires and is the source of much of the negativity associated with globalization.

While there may indeed be beneficial opportunities to manufacture in or source from lower-cost environments or providers, this decision should be made after considering total cost of fulfillment and how the decision will affect customers.

“The total cost of fulfillment is all of the costs of moving materials from one end of the fulfillment stream [or supply chain] to the other. These go far beyond the transportation costs most firms calculate to include the carrying and storage costs of inventory, the cost of material-handling equipment and labor, and the management time devoted to gathering all of the information needed to constantly monitor performance. These costs also include all of the transport, inventory, handling and management costs incurred by customers and suppliers along the fulfillment stream. The senior managers of every firm in the stream would find the total cost surprising large once summed.”

— Robert Martechenko and Kevin von Grabe, Building a Lean Fulfillment Stream¹

According to Sinn, there are plenty of examples of companies of all sizes that have benefited from moving into overseas markets by making smart decisions with a long-term focus. One of his clients, for example, had $3 million in sales two years ago when he began selling his product in China. The company has since doubled its revenues.

“They produce a product here that satisfies a specific need, and the Chinese companies don’t know how to do it,” Sinn said. “Companies that embrace globalization and are willing to improve will progress. The rest of the world will catch up only if we let them. Control is in our hand.”

¹Building a Lean Fulfillment Stream, Robert Martichenko and Kevin von Grabe, Lean Enterprise Institute, April 2010

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Jason Tuma, August 19th 2010 | Tags: , , , ,
Posted in Globalization



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