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Thursday, April 01 2010

Implementation of the International Financial Reporting Standards will have an impact on supply management

International Financial Reporting Standards (IFRS) are replacing the U.S. Generally Accepted Accounting Principles (GAAP) as a global standard.  Currently the US relies up GAAP for their accounting methods, however in 2012 a major change is coming.  IT implementations must begin this year for publically traded companies to be on track.

While reporting standards are the bean counters' problems, these changes affect all aspects of the business including Supply Chain Management.   SCMs will be directly affected in four areas.  Todd Neely explains the changes coming our way.

Supply Management Impacts

Four major changes IFRS has on supply chain management are LIFO, inventory valuation, long-term contracts and management responsibility.

Last in, first out (LIFO). The change to LIFO is easy to understand. IFRS does not permit inventory to be valued using the LIFO method. If you are valuing inventory using LIFO, implementing IFRS will require switching from LIFO to another method. The switch can have large tax consequences and should be thoroughly investigated to minimize taxes.

Inventory valuation. Under GAAP, inventory is valued once. As long as the inventory sits on the shelf, it reflects the historical prices paid. Under IFRS, inventory is valued at current market price. For many inventory items, the number of turns is high, resulting in current market price being equal to historical price paid. But for other items, significant changes between the price paid and current market price will require repeated revaluation to report the inventory's true value.

Long-term contracts. Under GAAP, possession and ownership are not the same. Under lease or consignment agreements, you can have possession but do not own the inventory. The inventory would not have to be included in the reporting of your financial statements. Under IFRS, when you take possession, you take responsibility. When you are responsible for an item, it is to be reported on the financial statements.

Management responsibility. The responsibility of management in making decisions on how financial data is collected and reported is much greater under IFRS. GAAP has rules and guidelines for most situations. The trick is to determine which rule or guideline applies to the situation you are investigating. Once the rule is found, apply it. Under IFRS, there are fewer rules or guidelines. You are responsible to do what is best to report the true financial condition of the situation. Whatever your decision, you will be responsible to consistently perform the same action repeatedly. If you change — you have to report why.

If you would like to read more, the article may be found in the weekly publication, Inside Supply Management. E-version is available at:

Posted by: Andrea Sitler PhD AT 05:32 pm   |  Permalink   |  Email

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