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

Innovation: More Than a Buzzword for Manufacturers

Leading companies are building cultures focused on identifying and realizing new opportunities to satisfy customers.

By Jason Tuma

While some business sectors use “innovation” as a non-specific buzzword, innovation has a precise meaning within manufacturing. It means identifying and capitalizing on new opportunities to improve products and services, internal processes and functions, and even management practices.

At leading manufacturers, innovation has become a structured part of daily activities, as well as a consistent plank in planning. Unlike in the past — even as recently as a decade ago — innovation in manufacturing goes beyond product design and engineering. It applies to functions such as sales, marketing, distribution, after-sales service, sourcing — essentially, all of the ways that manufacturers create value in a highly competitive global economy. Common denominators of successful innovation strategies are that they are focused on increasing customer satisfaction and have a long-term focus.

“Innovation is certainly about more than just products, and it doesn’t stop with process innovation,” says John Schober, Director of Innovation at MAGNET, which serves as a networking and advocacy agency for Northeast Ohio manufacturers. “Innovation is about creating value for your customer, and manufacturers have the opportunity to create value for their customers by also looking at their business models, their service offerings, or their delivery channels, to name just a few.”

In March of 2010, executives from some of the country’s largest manufacturers testified before Congress in support of government-funded programs that further manufacturing innovation. Their message: Innovation is what will keep the United States competitive in a global marketplace, and without it, overseas manufacturers will take away market share.

“In order to be relevant, we need to ensure that government R&D programs are focused on ways to provide high-quality assembly, non-destructive evaluation, and high rates of repeatability at large volumes,” Susan Smyth, Director of General Motors’ Manufacturing Systems Research Lab, told the House Committee on Science and Technology. “We need to focus attention on technologies that enhance our virtual and flexible manufacturing capabilities at the project level. Areas such as robotics, virtual manufacturing, and sustainability are key technology areas . . .”[1]

In Northeast Ohio, there are obvious opportunities for product-related innovation in technology-driven markets, such as medical instrumentation, biotech (industrial and medical), electronics, and automation. But what about manufacturers tied to “traditional” industries such as steel, autos, and heavy equipment? What are the opportunities there?  

“We expect that these non-traditional sectors will provide opportunities for manufacturers in our more-traditional industries,” Schober said. “GrafTech and Cardinal Fastener are telling examples. GrafTech found opportunities in the electronics market for its flexible graphite technology, and Cardinal Fastener found opportunities in the wind market for its fasteners.

“And for companies that remain focused on traditional industries, many opportunities will come from trends related to the cost and availability of energy — for example reducing weight in cars, minimizing waste energy [or material] in steel making, and optimizing energy usage in heavy equipment.”

Schober said one of the things limiting small- to medium-sized manufacturers from reaching their full potential through innovation is the struggle to find the right balance between supporting the current business and developing the future business.  Small to mid-size firms are more inclined to use the same internal resources for managing the current business and developing the future business.  In this battle for organizational resources, developing the future business often loses out.

Manufacturers can address this problem by adopting best practices in their organization that facilitate a focus on the future, and thus innovation. Outside service providers can help in this effort, but they often are tailored to meet the needs of large firms and startups — both in terms of cost and content — leaving small to mid-size firms without this option.

“MAGNET has an initiative in the works right now to address this gap for firms here in the region,” Schober said.  

 So is now — as the economy rebounds — a good time to start an innovation initiative?

 “The ‘right’ time to expand efforts to innovate is very unique to the circumstances of a company,” Schober said. “What is most important is not that manufacturers expand efforts to innovate now, but that they find the right way to manage innovation over the long term. Too many manufacturers never give innovation its appropriate attention.”

[1]Alpern, Peter; “Congress Hears Call for Manufacturing Innovation,” IndustryWeek, March 22, 2010

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Jason Tuma, March 23rd 2011 | Tags: , , , ,
Posted in Economy, Globalization, Innovation

Innovation – The Key to Recovery

Innovation is a hot topic and a word I have heard or read repeatedly over the last year. Coming out of this last recession, particularly if tied to the construction or automotive industry, the need to constantly innovate and enter new markets was a lesson hard learned by a lot of companies.

I recently attended a MAGNET Management Leadership Series, where Jim Carroll, the world’s leading futurist, trends and innovation speaker (as proclaimed on his website), spoke on innovation. Jim started his discussion with three of the following observations:

  1. 65% of today’s preschoolers will work in careers that don’t exist yet.
  2. 50% of the information you learn your first year of college is obsolete/revised by the time you graduate.
  3. More than 70% of products manufactured today will become obsolete in 10 years.

If these statistics are true, what a compelling argument for the need for innovation. Will your product be obsolete in 10 years? Will the method in which you manufacture your product be obsolete in 10 years? With technology changing at a faster and faster pace, it becomes increasingly more important to spend time thinking and planning for ways to innovate. 

When I think innovation, the first thought that enters my mind is getting out into the marketplace, talking to clients, prospects and thought leaders then brainstorming new ways  to develop or enhance our own services and procedures to adapt to market trends. Innovation should span all facets of your business from the products or services you sell to the way you sell them to the way you run your internal operations.  Jim went on to discuss the three questions companies should constantly be asking themselves:

  1. What can I do to run the business better?
  2. How can we grow the business?
  3. How can we transform the business?

One thing history has shown –moving forward “business as usual” with no plans for change, improvements or innovation means your business may not be around for today’s preschoolers.

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Jason Tuma, February 15th 2011 | Tags: , ,
Posted in Innovation

Economic Update

By: Jason Tuma, CPA

Last week, I attended a  meeting hosted by the Regional Manufacturing Coalition (RMC) in Shelby, Ohio.  The RMC is a coalition of approximately 50 manufacturers in Ashland, Richland and Crawford Counties. The coalition’s mission?  To help north central Ohio manufacturers prosper through education and networking. 

During the meeting, Linda A. Duessel, Senior Vice President and Senior Portfolio Manager for Federated Investors in Pittsburgh, gave an update on the economy.  Although many of the things she had to say were a bit depressing, she had a great presentation style and delivered her message with the perfect mix of humor and gravity. 

Some key points from her message:

  • The unemployment rate in the U.S. has been above 9% for the longest period of time since the Great Depression.
  • Although 2010 showed very positive signs of recovery, the manufacturing industry is still not in the mood to spend.
  • Biggest issues impacting manufacturers right now; growing sales and dealing with uncertainty in government regulations.
  • For all the hype and oftens time negative press, the auto bailout from 2008 appears to be showing signs that it worked.  In 2010, U.S. automakers are showing a 4% increase in production, 12% increase in sales and 49% increase in profits.

Duessel also spoke at length about the growing national debt. She believes that a value added tax (VAT) is coming to help alleviate the national debt. Currently about 100 countries, including Canada, Mexico and European Union countries assess the VAT.  A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products from another business. 

Duessel also pointed out that most people think raising taxes is bad for the economy. She points out that history has shown if the extra revenue from a tax raise is put directly towards paying down debt, there is little impact on the economy. However, if the extra revenue from taxes is turned around and spent on various government programs, then this has historically had a negative impact on the economy.

As 2011 is finally setting in I think we can expect to see gradual growth in the manufacturing industry as a whole, but those who will come out on top are those who innovate. As leader of the firm’s Manufacturing Practice Group I am digging down into innovation and plan on sharing what I find on this blog. We will also again be holding our Impact Manufacturing Forum this fall which will focus on Innovation for today’s manufacturer.

Stay Tuned…

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Jason Tuma, February 9th 2011 | Tags: , , ,
Posted in Economy



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