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IFRS – A big impact for Retailers? – Part 3

In the previous parts of this subject, i talked about the emergence of IFRS as a global standard that is increasingly becoming an imperative for US businesses and how more specifically the retailers will be impacted. Navigate through two key accounting methods that are used by retailers and a case for Cost Method of Accounting.

This part discusses the methods supported by SAP and how Cost plus Retail emerges as a strong contender not just to satisfy the IFRS requirements, but also for providing competitive advantage via Item – Location level profitability.


Inventory Valuation Methods Supported by SAP

SAP over the period of time has enlarged and refined the ways inventory accounting happens under the Retail Industry Solution.  SAP supports a wide range of inventory accounting methods from traditional year to date RIM, extended retail method of accounting, and Cost method with or without retail tracking. This wide spectrum of inventory accounting capabilities provides retailers with options to suit their business and accounting requirements.

The method supported by SAP can be categorized as:

     Aligned to Cost Method of Accounting:

  • Cost Only: This is the method invariably used by businesses outside retail. Many retail businesses have chosen to implement this method. Under this method the cost is tracked as perpetual moving average.
  • Cost Plus Retail: with the increased sophistication of analytics in SAP BI at the item -location level retailers are increasing seeing the value of this approach. This approach tracks the inventory at the prevailing retail as well as cost at perpetual moving average. The combination of retail and cost tracking in real time provides a powerful tool to the merchants in analyzing the performance of individual or segment of products in their assortment.

     Aligned to Retail Inventory Method:

  • Extended Retail Method of Accounting: cost is tracked at perpetual moving average. Inventory at prevailing retail is also tracked. Based on the retail price changes, markdown are taken for cost as well and booked to cost of sales. Though this method includes writing down of cost at the time of markdown, it differs from RIM in the sense that this is a perpetual method, while RIM is year to date (periodic).
  • Retail Inventory Method: under this method SAP tracks the units perpetually and accumulates costs for the transaction similar to other methods. However the units and costs are passed to a periodic stock ledger that computes inventory and inventory reliefs at location – merchandise category level. Based on the computation entries are created in the general ledger. In nutshell this method emulates the traditional Retail Method of Accounting.

 Irrespective of the inventory method chosen in SAP, inventory units are tracked at the item – location level.


Item – Location Level Accounting

The decision to move to an Item-location driven solution, such as SAP, may not be predicated only by IFRS. However emergence of IFRS has opened the debate for move towards an item – location level inventory accounting for business gains. Among which Item-location profitability is an important one.

While merchants maintain databases that provide them with indicative profitability of an item, it is at best budgetary and not at the location level. Further there are no easy ways to reconcile the item level profitability with the accounting books.  The properly accounted profitability is often available at an aggregated level usually at the class – location level.

Proper analysis of winners and losers, loss leaders, impact of promotions on actual gross margin, is often hard to compute or at best is based on allocation that can often be misleading.  Item -location level accounting provided by SAP provides tools to make such analysis. It allows you to compare items profitability of own brands with third party branded items to make meaningful space allocation or vendor negotiations.


IFRS and SAP Retail

Retailers may have different drivers to consider applications like SAP, which may include:

    * Competitive advantage of moving to item-location accounting
    * Integrated planning, execution and accounting solution
    * Replacement for ageing applications,
    * Consolidation of application footprint,
    * Move to a best practice driven packages solution vs in-house custom applications.

The emergence of IFRS should not just be seen as threat to the business, but also as an opportunity to trigger process change for incremental competitive advantage.

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