Category Archives: Finance

Don’t Forget to Take Advantage of LKE When Upgrading Supply Chain Assets

A recent article over in Inside Supply Management is “shining a new light on asset reinvestment” by pointing out that many companies can save as much as 44% of sale proceeds if they use like-kind exchange (LKE) or “1031” exchange to defer capital gains tax on sold assets when the sale is being used to generate cash to buy new, similar, assets to replace deprecated supply chain assets.

If you plan reinvest the the funds from the same of an asset in a similar or like-kind asset within the IRS established timelines to identify and purchase the replacement asset and conduct the transaction through a qualified third-party intermediary, then you defer the capital gains tax. This can save your organization a considerable amount of money over time if you’re selling over a million dollars of depreciated assets each year as you bring new, like, assets into the mix. As per the example in the article, if you sold $2 Million worth of assets each year and replaced them with like assets, after five years, that’s $10 Million worth of assets sold. If you ended up paying the equivalent of 40% in taxes, that’s 4 Million dollars you lost from cash-flow if all of the assets were replaced.

Seems like a no-brainer to me, especially since it will only cost a few thousand a transaction to have a qualified and knowledgeable legal or accounting firm act as the qualified intermediary, which is a fraction of what you’ll save when you’re selling Million dollar assets.

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The IFRS is Coming – Is Your Supply Chain Ready?

That’s right, the International Financial Reporting Standards (IFRS) could be replacing the Generally Accepted Accounting Principles (GAAP) at your US headquarters in as little as four years with the current proposals on the table. And since you have to maintain double books for a year (in GAAP and IFRS) before you switch over, to make sure you have a good handle on the new rules, that means your new IFRS-friendly systems have to be in place in less than three years. Which means your people have to be trained in less than two years … especially since major exams, like the CPA, will start testing on IFRS material in 2012. (And when you consider that the EU has been using IFRS for five years now, and that over 120 countries have already adopted it, it’s about time that North America caught up. Canada catches up next year, and Mexico follows suit in 2012.)

The IFRS has a number of changes in store for supply chain management, including these four outlined in this recent ISM article on the “accounting changes ahead”:

  • Last In, First OutIFRS does not permit inventory to be valued using LIFO. This can have significant tax consequences.
  • Inventory ValuationUnder IFRS, the inventory valuation you use must reflect current market price.
  • Long-Term ContractsUnder IFRS, when you take possession of inventory, you take responsibility for it and it must be reported on financial statements.
  • Management ResponsibilityThe responsibility of management with respect to data collection and reporting is much greater under IFRS.

The complete overhaul of systems that will be required at many companies could make SOX look like a walk in the park. If you haven’t yet figured out how it’s going to affect your organization, better find an expert sooner rather than later.

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