Manufacturing
Insider
Insights & Observations for the Manufacturing Industry
In This Issue
Having Trouble
Saying Goodbye
to LIFO? You’re
Not Alone................1, 2, 3
Case Study:
Administrative Process
Improvement
Optimization............... 4, 5
Volume 3 :: Issue 2
Having Trouble Saying Goodbye to LIFO?
You’re Not Alone.
For over 70 years, the IRS has permitted U.S. companies the option of valuing the cost of inventory
using the last-in, first-out inventory method of accounting (LIFO) for income tax reporting purposes,
as long as the US Company follows a conformity requirement. Under the conformity requirement, US
companies who wish to adopt LIFO accounting for income tax reporting purpose, must also use LIFO
for financial statement reporting purposes.
And many companies in the U.S. want to keep it that way.
However, International Financial Reporting Standards (IFRS), the global standards now adopted by
over 100 countries including those in the European Union, does not permit the use of LIFO for financial reporting purposes. Consequently, LIFO’s days may be numbered as companies adopt IFRS and
find they can no longer use LIFO for income tax reporting purposes due to the conformity requirement.
Continued on Page 2...
The Next Level Of Service
UHY LLP
Having trouble saying goodbye to LIFO? You’re not alone. Continued from Page 1...
U.S. officials now wonder if they should change the conformity rule
to allow US companies to both comply with IFRS by converting
to another approved method such as first in first out (FIFO), for
example, and still keep LIFO for calculating U.S. taxes.
Such a move would require new federal legislation and strong
support to muster passage. Meanwhile, Congress and U.S.
Treasury officials see significant new revenue generated without
the political hurdle of raising rates or establishing new taxes,
should the conformity rules remain unchanged.
While that political debate will play out in the coming months,
here are some considerations related to IFRS and LIFO to help you
further understand the issue:
As a result, taxpayers currently using LIFO for federal income
tax purposes would, upon conversion to IFRS, be required to
change from LIFO unless they qualify for an exception to the
LIFO conformity requirement. Many US companies with a foreign
parent that have already converted, or are in the process of
converting, to IFRS have already faced this issue.
IFRS Conversion
LIFO Debate Continues
Under a LIFO system, ending inventory is deemed to consist
generally of goods purchased in the order of acquisition. As a
2
result, LIFO serves to match current sales revenue with current
inventory costs, which effectively expenses inflation. While some
view LIFO as providing better matching on a company’s income
statement, the global movement toward IFRS has renewed the
focus on presenting the company’s balance sheet at fair value for
financial reporting purposes, reporting the more current inventory
valuations on the balance sheet.
UHY LLP
Manufacturing Insider
Volume 3 :: Issue 2
Members of President Obama’s Administration have argued that
LIFO provides an unfair tax deferral opportunity when inventories
increase in value. The Treasury also argued that the repeal of LIFO
would remove possible impediments to the potential adoption of
IFRS in the U.S.
financial accounting LCM rules, which generally do not apply
on an item-by-item basis, and generally define market based on
selling prices.
But LIFO supporters contend that the Treasury doesn’t need to
wait for Congressional approval to modify regulations to address
the conflict between the LIFO conformity requirement and IFRS.
Faced with a similar situation in the early 1980s when the SEC
required increased disclosure for companies on LIFO, the Treasury
responded by issuing regulations that relaxed the LIFO conformity
requirement without Congress.
Regardless of whether your company changes from LIFO to FIFO
as a result of adopting IFRS or because of legislative repeal, such
change is likely to have a significant impact on your tax burden.
Even if LIFO is extended for your company – either through
legislation or by qualifying for relief – you should plan today for
the very real possibility that it will be gone.
Planning for LIFO’s Demise
In the event a taxpayer is required to terminate its LIFO election,
they should consider the opportunities available to help alleviate
the potential cash tax impact resulting from the termination of
the company’s LIFO election. Under current IRS administrative
procedures, if a taxpayer changes its tax method of accounting
from LIFO to another acceptable inventory method, and the
change results in a higher inventory value, the positive adjustment
to income is taken into account over four taxable years.
In contrast, the Obama Administration’s released its fiscal year
2011 budget proposal on February 1, 2011, which provides for
a repeal of the LIFO inventory accounting method for federal
income tax purposes effective for years beginning after December
31, 2011. This one-time increase in gross income would be spread
ratably over ten taxable years.
What You Can Do
While companies may not be able to avoid unfavorable
adjustments to taxable income as a result of changing from
LIFO to FIFO, companies may be able to mitigate the impact by
selecting favorable valuation methods of accounting for their FIFO
inventories. Under LIFO, taxpayers must value their inventories at
cost. Under FIFO, taxpayers have the advantage of being able to
value their inventories below cost, including using the lower of
cost or market (LCM) method and the subnormal goods method.
For example, a taxpayer changing from LIFO to FIFO may want to
adopt the LCM method to value its ending inventory for US tax
purposes. For normal goods, the LCM method allows taxpayers to
analyze each item or component in ending inventory and value
it at “market,” defined as reproduction or replacement cost, to
the extent market is less than cost. This approach differs from
3
UHY LLP
Manufacturing Insider
Volume 3 :: Issue 2
As any experienced business person knows all too well: Don’t
rely entirely on a government solution.
Article written by F. Michael Zovistoski (Albany, NY)
UHY LLP
The Next Level Of Service
Case Study: Administrative Process
Improvement Optimization
The Challenge
The Executive Director of Enterprise Accounting Services accepted
responsibility for the recently centralized Accounts Payable
functions at “NewCo”. The objective of the centralization was
to gain efficiency and productivity opportunities while leveraging
economies of scale. The centralization (which was still in progress
when the Executive Director took over) would allow for the
elimination of accounting functions at field locations, including
accounting activities performed by non-accountants such as
expense coding, for example.
In addition to “NewCo” centralizing Accounts Payable functions,
they also made a decision to offshore transactional activities.
Now with an outside service performing part of the process steps,
exception queues became the focus for much of the work of the
internal “NewCo” team. The processing of these exceptions
required a staff of 29 “NewCo” employees and contractors.
“NewCo” employs an internal continuous improvement group.
While the continuous improvement staff has a background
in accounting, finance and audit, the group had traditionally
focused on system-related issues and improvements. With a
large share of the 19 exception categories having root-causes
in the quality of information provided into the process, and
other process insufficiencies, the toolset available internally to
“NewCo” provided limited traction in reducing the exceptionrelated workload.
Faced with a considerable task that required sustainable
operational change, the Executive Director turned to UHY Advisors
Management Consulting practice group to implement Enterprise
Optimization (EO) services. UHY Advisors five year history with
“NewCo”, its understanding of administrative efficiency and
its accounting expertise made it a credible choice. Not only is
this true, but UHY Advisors consulting team possessed extensive
real-world finance and accounting experience combined with
process–engineering and improvement expertise.
Consultants draw on a broad set of methodologies and select
tools most suitable to a specific situation. The tools include Lean,
Six Sigma, Theory of Constraint, Total Quality Management (TQM)
and Balanced Scorecards. This makes the firm a thought leader as
well as a partner capable of implementing and delivering results.
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UHY LLP
Manufacturing Insider
Volume 3 :: Issue 2
More specifically, “NewCo” wanted to identify any performance
gaps as compared to an ideal process with respect to productivity,
timeliness and accuracy, so as to:
•Leverage efforts to centralize, automate and standardize
processes and functions as rolled out by “NewCo”.
•Create a predictable and reliable environment, where the
majority of transactions follow a standard process flow.
•Improve service to their internal customers by minimizing
the effort required in the process and resolving exceptions.
The Solution
Assessment
The change and transformations process started with a threeweek assessment. While UHY Advisors conducted most of the
activities performed during the assessment, it became the
inception of the ensuing change process.
To provide a structural analysis of the process flow, brown paper
process maps (i.e. live document flows) were developed for eight
areas involving associates at all levels and providing a factual
presentation of process inefficiencies and wasted efforts. The
following activities became an integral part of the brown paper
process mapping:
• Strategic interviews with area leadership to understand
strategy and direction, key issues and planned activities
related to the areas assessed.
• Evaluation of the strength of the tools, processes and
information being utilized.
• Detailed operational observation, studies and data analysis
in order to:
- Identify opportunities to increase productivity through
elimination of redundancies, rework and extensive
audit.
- Highlight root-causes of stagnation, delays, rework and
unnecessary follow up.
-Evaluate current transaction mix against resource
commitment and materiality.
-Provide foundation for factual and constructive
discussion to a holistic improvement approach.
-
Prioritize activities to capture highest-yielding
opportunities first.
Continued on Page 5...
The Next Level Of Service
UHY LLP
Case Study: Administrative Process Improvement Optimization Continued from Page 4...
The brown paper process maps were first reviewed and studied with
more than 30 associates, including internal customers and suppliers
of information, and then shown to supervisors and managers. This
approach ensured accuracy of the facts and opportunities depicted.
Eventually, “NewCo” executives were involved in the process map
review as well. By this time, the organization had already bought
into the opportunities identified and had started a dialog using a
common process perspective.
Implementation
Based on the assessment, UHY Advisors developed an implementation
plan, prioritizing five areas with the greatest opportunities compared
to the implementation effort required:
1. Exception reduction focused on a systematic approach to the
root-causes leading to exceptions. This included improved processes,
education and training of repeat offenders and exception resolution
at the time of detection, eliminating the second touch previously
required.
2. Removal of utility invoices and statements from the AP stream,
previously accounting for more than 12% of the total AP invoice
volume. “NewCo” created a separate flow for utility charges,
integrating an energy dashboard infrastructure already established
at the corporate parent.
3. Vendor set-up and maintenance, including the creation of a simple
but efficient upload, error-proofing and validation of vendor data
reducing the time to set up a vendor from eight minutes to less than
one minute.
4. Implementation of UHY Advisors proprietary Optimal Performance
Management System (OPMS™), a system of metrics, true capability
based goals, visual controls and enhanced behavioral routines
that establish accountability with staff, supervisors and managers.
The OPMS™ also allows for timely identification of performance
shortfalls and immediate deployment of corrective action.
5. Training of “NewCo” resources on the UHY Continuous
Improvement Methodology; utilizing the same materials, methodology
and curriculum as used to train the consultants at UHY Advisors.
The changes involved cross-functional teams that drew on the
day-to-day experience, understanding of the business and systems
knowledge of “NewCo” employees. UHY Advisors was responsible
for specific deliverables, while the detail of the improved processes
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UHY LLP
Manufacturing Insider
Volume 3 :: Issue 2
greatly integrated and reflected the collective intelligence of the
organization.
Based on limited information available at the time of the assessment,
particularly with respect to root-cause classification and frequency,
UHY Advisors conservatively outlined Enterprise Optimization goals
as follows:
•Reduction of exception-related activities by at least 33%
within six months.
•Reduction of exception-related activities by at least 50%
within one year.
•Resulting savings that equate between five to 10 full-time
employees.
The Result
By collaborating with UHY Advisors’ expert consultants, “NewCo”
is now poised to save $1.5M annually. Already they have been able
to reduce AP resources by 79% and are thrilled that the final results
exceed set expectations by almost double. The engagement will more
than pay for itself within the first year and yield an annualized return
of four times the implementation fee.
Since UHY Advisors Enterprise Optimization assessment and
implementation began in May 2010, “NewCo” has already realized
significant new efficiencies, including:
• 64% reduction in exceptions processed at corporate: A weekly
average of 1,506 in April was reduced to the current rate of
536 per week.
• 55% reduction in rush payments processed from an average
of 293 transactions to 133.
• 5% increase in on-time payments from 75% to 79%.
• 80% improvement in the process for utilities payments from
five touches to one.
• 88% improvement in the data-entry process for setting up
new suppliers, from an average of eight minutes to less than
one.
• 79% reduction in resources required for the corporate AP
function, from 29 resources to six.
The implementation involved limited transitioning of additional
activities to an outsourced provider. The outsourced provider did not
need to increase its resources to handle this additional workload
because UHY Advisors improvements reduced the work effort
required by the outsourcer.
Article written by Frank Fenello (Atlanta, Georgia)
Our Locations
Manufacturing Services
UHY LLP recognizes that manufacturing companies require their auditors, tax
and business advisors to add value to financial reporting activities. We combine
the strength of business and financial expertise with a hands-on, “shop floor”
approach to solving complex business decisions in these key segments:
• Aerospace & Defense
• Distribution
• Automotive & Suppliers • Industrial Manufacturing
• Consumer Products
The professionals at UHY LLP help lead the industry in identifying and addressing new trends, accounting requirements, and regulations, ensuring our clients’
future success.
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Additional UHY Advisors Locations
For more information please contact Tom Alongi,
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