Miles CMA Review: 2018 Updates

Transcription

1 Miles CMA Review: 2018 Updates Summary of updates: - Part 1, Section A - FASB Pronouncements on Subsequent Measure of Inventory (eligible for testing January 2018) - Part 1, Section A - Statement of Cash Flows: US GAAP vs. IFRS - Part 2, Section F - Updated IMA Professional Ethics Statement

2 Part 1, Section A - FASB Update on Inventory (tested from Jan 2018) VI C) Inventory Valuation LCM or LCNRV Under US GAAP, Inventory is valued at: Lower of Cost or Market (LCM) - if LIFO or retail inventory method, Lower of Cost or NRV (LCNRV) - if methods other than LIFO or retail inventory method (e.g., FIFO, average cost) where Cost = Original cost measured by one of the inventory costing methods like FIFO, Average Cost, LIFO, Retail Inventory method NRV (Net Realizable Value) = Net selling price - Cost to complete & dispose Market = Middle of the following 3 numbers: Ceiling = NRV Floor = NRV - normal profit margin Replacement cost = Cost to purchase or reproduce (which could be more than the ceiling, between the floor and the ceiling or less than the floor) Note: - FASB issued Accounting Standards Update simplifying the measurement of inventories by replacing Lower of Cost or Market test with a Lower of Cost or NRV test. However, the new guidance applies only to inventories for which cost is determined by methods other than LIFO and retail inventory method - i.e., entities using LIFO or retail inventory methods continue with Lower of Cost or Market [IFRS always required Lower of Cost or NRV ] The Board released the new guidance as part of its simplification initiative, which, as explained in the ASU, is intended to identify, evaluate, and improve areas of US GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements Effective Dec 15, 2016, for public companies, and Dec 15, 2017, for non-public companies - Earlier: US GAAP required Lower of Cost or Market for all methods LCNRV / LCM is based on the principles of Conservatism & Matching If NRV < Cost (or Market < Cost for LIFO/retail methods), recognize loss immediately on I/S: Loss on Inventory due to decline in NRV (Market price for LIFO/retail methods) XXX Inventory XXX On inventory write-off, new cost basis of the inventory is created; even if NRV (or Market price) increases subsequently, reversal of write-down is not allowed (recovery only on sale of goods) In case of rising costs, inventory would generally be valued at Cost while in case of falling costs, inventory would tend to be valued at NRV (or Market) Exceptions to the LCNRV / LCM rule: Sale price of goods not affected by market value (value at cost) Company has a firm sales price contract (value at cost)

3 Precious metals & farm products (value at NRV even if higher than cost, but fully disclose in F/S) Under IFRS, inventories are always valued at LCNRV - Lower of Cost or Net Realizable Value Note: Same calculation for US GAAP if other than LIFO & retail inventory method Exception for biological assets (living plants & animals) which are carried at NRV; agricultural produce is carried at fair value less costs to sell at point of harvest Further, IFRS allows reversal of previously recognized write-downs of inventory (similarly, IFRS also allows reversal of fixed asset impairment - to be covered in Fixed Assets section) Example for Inventory Valuation: Part 1: LCM Co. determines that as of 12/31/2010 the replacement cost of its inventory is $100,000. Estimated selling price is $140,000 which includes selling expenses of $20,000 and a normal profit margin of $30,000. Cost of inventory is calculated to be $110,000 (assume same cost under both LIFO and FIFO). Calculate the value of inventory as of 12/31/2010 under LIFO and FIFO methods (both under US GAAP). Part 2: If replacement cost is re-calculated to be $80,000, what would be the new value of inventory Solution - Part 1 of 2: $110,000 Ceiling (NRV) = $140,000 - $20,000 = $120,000 Floor (NRV - profit) = $120,000 - $30,000 = $90,000 Replacement = $100,000 US GAAP - LIFO: Market (Middle of the 3) = Replacement cost of $100,000 Lower of Cost ($110,000) or Market ($100,000) = $100,000 US GAAP - FIFO (same calculation for IFRS): NRV = $120,000 Lower of Cost ($110,000) or NRV ($120,000) = $110,000

4 Part 1, Section A Cash Flows (US GAAP vs. IFRS) IV) Statement of Cash Flows IFRS allows more flexibility in classifying cash flows related to interest, dividends, and income taxes IFRS classifies taxes paid as Operating, but allows allocation to Investing or Financing for portions specifically identified with investing and financing activities Interest or Dividends received may be Operating or Investing Interest or Dividends paid may be Operating or Financing Transaction US GAAP Classification IFRS Classification Taxes Paid Operating Operating, Investing or Financing Interest Received Operating Operating or Investing Interest Paid Operating Operating or Financing Dividends Received Operating Operating or Investing Dividends Paid Financing Operating or Financing

5 Part 2 Section F [Introduction to Professional Ethics] IMA updated its Professional Ethics Statement, effective July 1, 2017 Key changes noted: One element shifted from Competence standard to the Credibility standard Addition of a new element to the Integrity standard Overall softening of what were once very detailed steps to take when resolving conflict Replace content on Pf F-4 and F-7 by the revised content on following two pages

6 IMA s four standards of ethical conduct - Based on the application of the four principles. An IMA member's failure to comply with ethical standards may result in disciplinary action Competence - The rules in accounting are as diverse as they are dynamic. Keeping up to date with changes in regulations and the adoption of new laws and standards in the industry is essential. Failing to do so may unknowingly lead to unethical behavior. Each member has a responsibility to: Maintain an appropriate level of professional leadership and expertise by enhancing knowledge and skills Perform professional duties in accordance with relevant laws, regulations, and technical standards. Provide decision support information and recommendations that are accurate, clear, concise, and timely. Recognize and help manage risk Confidentiality - While the confidentiality standard is fairly straightforward, today s technological advances may actually hinder management accountants from following it as diligently as they must. Not only should paper & electronic documents be properly secured, but all conversations, especially those on cell phones, should be conducted only in a private setting and never in public locations like airports & cafes. Each member has a responsibility to: Keep information confidential except when disclosure is authorized or legally required Inform all relevant parties regarding appropriate use of confidential information. Monitor to ensure compliance Refrain from using confidential information for unethical or illegal advantage Integrity - Integrity includes the responsibility to communicate both the good and the bad, whether it is news, analysis, judgment or professional opinion. Each member has a responsibility to: Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts of interest Refrain from engaging in any conduct that would prejudice carrying out duties ethically Abstain from engaging in or supporting any activity that might discredit the profession Contribute to a positive ethical culture and place integrity of the profession above personal interests Credibility - Credibility ties in closely with competence. In order to be credible, an individual must be competent. Underlying credibility is the management accountant s duty to plan ahead and assess potential risks, gather enough information to be fully informed about all relevant facts and communicate unfavorable news promptly. Each member has a responsibility to: Communicate information fairly and objectively Provide all relevant information that could reasonably be expected to influence an intended user s understanding of the reports, analyses, or recommendations Report any delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law Communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity

7 Resolution of Ethical Conflict - In applying the Standards of Ethical Professional Practice, the member may encounter unethical issues or behavior. In these situations, the member should not ignore them, but rather should actively seek resolution of the issue. In determining which steps to follow, the member should consider all risks involved and whether protections exist against retaliation When faced with unethical issues, the member should follow the established policies of his or her organization, including use of an anonymous reporting system if available If the organization does not have established policies, the member should consider the following courses of action: The resolution process could include a discussion with the member s immediate supervisor. If the supervisor appears to be involved, the issue could be presented to the next level of management IMA offers an anonymous helpline that the member may call to request how key elements of the IMA Statement of Ethical Professional Practice could be applied to the ethical issue The member should consider consulting his or her own attorney to learn of any legal obligations, rights, and risks concerning the issue If resolution efforts are not successful, the member may wish to consider disassociating from the organization