FASB Inventory Valuation Rules
1. My feeling on leases is that they are just a unique way for companies to engage in off-balance sheet accounting. The lessor of the property has no ownership responsibilities but all of the advantages. The lessor gets the ownership write-offs with no usage benefits. Here is an example. Airlines typically do not own the tires on their planes. They lease; the tires. This does not make any sense to me. I mean, if an airline decides that it no longer wants the tires, can they be reposses and re-leased? Moreover, weren’t the tires uniquely created for the specific plane owned by the airline?
My point is that the FASB goes through a lot of work to list the criteria that determine whether a lease is operating or not. In my opinion, if the property is uniquely used by an entity and the payment is consistent, is that not a transfer of ownership? I just believe that this loophole will prove burdensome in times to come. The Enron era did result in a lot of changes in accounting laws. But, this provision is still just too flexible – at least in my opinion.
What do you think?
Financial Accounting Standards Board (FASB) needs to change its rules on the aspect of leasing in regard to a company’s off- balance sheet. This is would ensure that certain types of leasing is discouraged like the one that is practiced by airlines whereby they have the tires as leased equipments than owning them. The problem is that the item is not to be used for a short period. It belongs to the plane and it cannot be re- possessed by the company leasing it to the airline. A lease should be a contract meaning that the lessee should use the item for a specified time according to the agreement and upon the due date return it. The leasing has an impact on the balance sheet of the lessee as it has on that of the lessor (O’Grady, Peterson and Lam, 2013).
This idea which is applied by many companies does not look satisfying to me. It is especially on the transfer of ownership of property. I don’t see the reason why the tires should be considered as to have been purchased by the airline and the deal between it and the seller end there. This would make the process of inventory valuation to be easier. It will prevent corruption as it happens with many companies that engage in similar behaviours allowing them to hide unethical practices (O’Grady, Peterson and Lam, 2013).
The form of leasing seen with the hiring of tires by the airlines characterizes unnecessary partnership. More companies are included in the process of doing inventory valuation and auditing for which each is a separate entity (O’Grady, Peterson and Lam, 2013). In this sense, if payments are being done on frequent basis to the partners and in this case the lessor, it will be more tedious to get the actual value of the business. On the other hand, the actual profits and losses are revealed through exposing of all the values both in form of cash and assets. It is therefore right for the Accounting board to review such accounting related behaviours so as to prevent any tricks that will be disappointing in the future.
2. Inventory valuation methods can be changed with little more than paperwork from company managers.
Inventory can be claimed to be obsolete by the same managers. I do agree with the FASB’s distinguishing factors for what qualifies as inventory as far as publicly-traded companies are concerned. I also believe, however, that IRS inventory valuation rules are easily abused by small business.
In your opinion, how closely do FASB inventory valuation rules mirror IRS requirements? Which body of laws do you believe are the most reliable? Why?
Both the Internal Revenue Service (IRS) and FASB expect exposure of profits and tax return by the companies. Despite the differences in the rules of IRS and FASB, the two mirrors each other in certain rules and aspects. The IRS being a political organ is usually given priority due to the benefits that accrue from tax collection (Tugeon, Zarzar and Smith, 2009). The result is failure to tax rules to move in the path of FASB practices. The activities relating to accounting in releasing of financial statements in many cases differ. The companies treat them differently when it comes to tax returns. All the statements are supposed to reveal the same thing in terms of values relating to the profits and taxes.
The FASB inventory valuation reflects mirrors IRS requirements in that accrual method is used for making of the financial statements (Tugeon, Zarzar and Smith, 2009). This is in recording that are meant to determine tax. Tax accounting follows the rules of FASB. In this sense it is possible to uncover both the income and expenses that result from a particular output. Upon revelation of the costs and the profit, it because easy to determine the tax because it should be on profits. The idea that this mainly applies with big companies, the small companies fails to adhere to the rules.
Similarly, the IRS has to depend on the FASB rules defining on the way to deal with depreciation (Tugeon, Zarzar and Smith, 2009). Long- term assets depreciation leads to less usefulness in bringing profits to an enterprise. FASB insists that an item’s value continue to decrease in regard to the ideal time for its wear and tear. The political element of IRS has led to the congress to change the rule and put in place depreciation allowances at certain time. IRS in this case holds more power but has to depend on the accounting board FASB is the overseer of the accounting rules and regulations.
3. I find the NIFO designation to be truly interesting. What makes this scheme illegal or is it? In your opinion, would it be beneficial to enact a law that allows this? Why or why not? If it is illegal, do you think that this matter to companies who use it? If so, have any of them been caught? Is there a penalty for using NIFO? Give an example and citation to support your response.
NIFO is a method that in the process of evaluation a company refuses to use the original cost to approximate profit as it is the rule provided by FASD (Fazal, 2011). Instead, it uses the replacement cost of an item. An item can have an original cost of $19 and it has been sold for $30 dollars and the replacement cost is $ 25 dollars. Through the use of NIFO valuation, the gross profit will be given as $ 5 instead of $ 11. This is the reason why it is considered illegal.
There is no major company that has been caught using NIFO. However, the small enterprises are using the method to a good extent. Use of NIFO is logical because it takes care of all costs. It therefore provides the market value of the item (Fazal, 2011). The method ensures that no money get lost since the inventory provides the actual value. However, this is not appropriate since the other costs above the original cost cannot be easily determined. FASB puts a standard measure based on the original cost to prevent unethical behaviours. If replacement cost is encouraged then a company may exaggerate it making easier for corruption.
Companies would prefer this method of evaluation because it takes into context other costs including transport, administrative and the taxes. All the items do not have similar costs of replacement. Certain companies will therefore bear more cost compared to others. Generally, replacement value is based on the base stock. Both the physical and the economic inventories are taken into consideration (Fazal, 2011). However, there is a tendency to do speculations of the normal inventory. Companies would like the method during the time of inflation but not the vice versa. They will replace the item time before the inflation. The method is therefore not acceptable and should not be put in place.