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IFRS – A big impact for Retailers? – Part 1


The emergence of International Financial Reporting Standards (IFRS) a global accounting standard and the proposed roadmap by SEC for its adoption has lent a sense of urgency to understand the impacts within businesses. This brings into perspective the impact that IFRS can have on inventory valuation for retail companies. The change is significant, because the prevalent Retail Inventory Method (RIM) is not yet explicitly permitted by IFRS. This will require changes to the systems because RIM does not require item – location level tracking of cost, while Cost Method of Accounting (CMA) does require. A move to CMA provides significant strategic benefits beyond compliance to IFRS. This blog in this and subsequent parts will discusses this opportunity.  The value proposition has been created in the context of SAP Retail solutions that provides support to RIM and CMA.


IFRS Roadmap and Need for Action

International Financial Reporting Standards (IFRS) is a set of accounting standards developed by the International Accounting Standards Board (IASB) for public companies around the globe. About 12,000 companies in 113 countries have adopted this standard for Financial Reporting.  IFRS is increasingly being adopted by individual country’s regulatory agencies.

SEC issued (in November 2008) a proposed roadmap that will require public companies to report by IFRS from 2014 onwards in a phased transition. Given the magnitude of change proposed, SEC has extended the public comment period until April 2009.

As per Journal of accountancy – “Under a staged transition, IFRS filings would begin for large accelerated filers for fiscal years ending on or after Dec. 15, 2014. Remaining accelerated filers would begin IFRS filings for years ending on or after Dec. 15, 2015. Non-accelerated filers, including smaller reporting companies, would begin IFRS filings for years ending on or after Dec. 15, 2016”.

Based on the comments received so far a commentary from AICPA indicates that even though many participants have shown support for high quality global generally accepted standards, there is very significant criticism too. The main area of criticism is relating to the cost of transition effort, approach – convergence to IFRS vs adoption of IFRS (SEC is proposing adoption of IFRS), and concerns of specific industries not being met.

SEC has completed the receipt of comments phase and will be providing final guidance on the timetable and also whether IFRS is mandated or adopted for US public companies.


IFRS and Inventory Valuation

IFRS is a principle based standard.  IFRS currently mandates that saleable inventory of a business should be recognized at cost. This will be true of retail businesses as well, unless an override ruling is provided by SEC.

US GAAP is a rule based standard. A large number of specific rules interpretations have been defined to meet specific situations or industry requirements. Retail Inventory Method (RIM) has been specifically permitted for retailers for inventory valuation.

Important questions for many retailers who use Retail Inventory Method of Accounting (RIM) are whether RIM will be permitted under IFRS.  This question is increasingly being discussed by retailers.  National Retail Federation in its comments to SEC on the IFRS roadmap has expressed concern over potential non-admissibility of RIM under IFRS and the ensuing cost and effort to remediate. Some auditors have opined that RIM “May be used for convenience if the results approximate cost” under IFRS. At this stage no final opinion had been issued by SEC.

Retailers, large and mid-sized, are seeking answer to this question and are also weighing other benefits that can make Cost Method of Accounting (CMA) more attractive.

Is there a business case for moving away from RIM to CMA? This is one of the questions that I will discuss.

 Read what the possibilities are for retailers in my next blog.

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      Author's profile photo Former Member
      Former Member
      People often lose sight of the impact of guidelines and accounting needs. Glad to note you have highlighted some key considerations. Looking forward to further discussion.



      Author's profile photo Former Member
      Former Member
      Blog Post Author
      Puneet many thanks for your comments.

      On one hand we have this looming change in the accounting standard that will have an impact on the processes and accounting. This blog is about steering this challenge into an opportunity for the retail businesses.