December 13, 2021

Financial Reporting: Accounting Implications of Current Business Conditions

This Deloitte report addresses several topics that many businesses will find very relevant in the current environment – the financial reporting implications of inflation, supply chain disruptions and labor shortages. Here’s an excerpt addressing some of the accounting concerns associated with supply chain issues:

For many companies, such disruption is significantly increasing the costs associated with moving goods through the supply chain. If the higher costs are included in inventory, companies should consider whether these costs drive up the cost of the inventory in such a way that adjustments based on the expected net realizable value of the inventory are warranted. This determination is likely to vary by industry and by company given (1) the use of different types of materials, (2) diversity in suppliers, and (3) a company’s ability to transfer cost increases to its customers through higher selling prices.

While the goods are making their way through the disrupted supply chain, companies should consider the point in time at which the buyer actually assumes ownership of the goods to ensure appropriate reporting of raw materials, finished goods, and supplies on their balance sheets. Companies that may have had only immaterial amounts of goods in transit because of historically short transit times may find it necessary to implement more robust accounting processes and internal controls to appropriately capture their inventories (some of which may be physically held by third parties). Likewise, companies should ensure that suitable cutoff procedures result in revenue recognition in the appropriate period.

In addition, companies struggling to obtain certain products that are inputs to finished goods, such as microchips, may consider adjusting their manufacturing processes to use different inputs or manufacture the products differently. Companies should consider whether the need to use alternate raw materials or processes affects the warranties offered and the accounting for those warranties.

Issues like these are worth keeping in mind as companies prepare their financial statements, but their potential implications should also be considered in preparing the MD&A and Risk Factors sections of upcoming SEC filings.

John Jenkins