New accounting standards will affect supply chain management

No matter how much you would like to leave accounting procedures entirely to your finance department, you can't afford to do so, writes Todd Neely in the Quarter 1/2010 issue of CSCMP's Supply Chain Quarterly. That's because the new International Financial Reporting Standards (IFRS) will have a major impact on supply chain management and costing.

More than 100 countries, including all of the European countries, have already adopted IFRS, while others, such as Canada, Mexico, and Japan are set to adopt the measures in the near future. The United States, meanwhile, is slowly moving in that direction.

What are the implications for supply chain professionals? Here are just a few:

1. Supply chain managers will need to help determine the best way to measure and report financial information. Under the U.S. Generally Accepted Accounting Principles (GAAP), there is little room for interpretation—detailed rules define inventory valuation and accounting for leasing agreements, for example. Under IFRS, management will have to decide how to ensure that the best financial information is consistently reported and recorded on an ongoing basis. Supply chain managers, therefore, will need to be extensively involved in these decisions; otherwise accounting procedures will be established by employees with little understanding of their decisions' effects on supply chain activities.
2. Negotiated agreements may have to be rescinded or revised under IFRS. For example, to obtain a reliable source of supply for scarce or costly materials and services, a supply chain manager may have negotiated and established unique and creative agreements. Under IFRS, some of these agreements may no longer be possible because they separate the party that has ownership of an item from the party that has the responsibility, risk, and beneficial use of that item. This prevents the best information from being reported accurately, thus it is not allowed under IFRS. Lease agreements, long-term supply contracts, barters, and consignment agreements all need to be analyzed to determine if they can continue, and, if so, what will be the best accounting method to use for them.
3. Inventory valuation may be affected. In most cases, inventory valuation remains the same under GAAP or IFRS, but there are some significant differences. U.S. GAAP generally utilizes historical cost and prohibits revaluation. But under IFRS, in cases where a large market-price increase occurs, as happened with oil, inventory values might need to be revalued at the higher market price. Moreover, when an inventory item is used sparingly—such as emergency or safety items—the historic price paid might be significantly different than current market prices. In such a case, management will decide on the best, consistent method for valuing the inventory. In addition, IFRS prohibits the Last-In, First-Out (LIFO) inventory-valuation method. If a company is using LIFO, it must switch to another inventory-valuation method (a major exercise with many ramifications) before IFRS can be implemented.

For more information about the many ways that the International Financial Reporting Standards will affect supply chain accounting practices, read "Get out your calculators" in the Q1/2010 issue of CSCMP's Supply Chain Quarterly.