Investors usually count on a company’s quarterly or annual financial reports to get a better grasp of the firm’s financial conditions and operating performance. Banks also use the information for credit decisions. Since inventories are among the most important assets many companies have, how they are calculated and booked in a company’s financial report has become increasingly crucial to investors and banks.
A revised accounting rule for inventory booking was implemented on Jan.1. It is known as International Accounting Standards Statement No. 10, and requires listed companies to provide financial reports in a more transparent and accountable manner.
In implementing the rule, the government also hopes to bring Taiwanese companies into alignment with international standards, as Japan, Hong Kong and Singapore have all adopted similar measures.
The revised accounting rule has companies measure inventories at net realizable value, which refers to the estimated selling prices minus any estimated costs to complete and sell the goods. Under the old rules, companies would determine the value of inventories by their replacement value — the amount it would cost to purchase the same goods to replace the inventories.
Secondly, the revised rule requires listed companies to book their inventory write-offs as costs of goods sold rather than as non-operating items. It also demands that listed companies list their inventories item by item in financial reports rather than writing them down as a group.
For listed companies, the revised accounting rule helps them reach quality asset appraisals and enhance their inventory management. To those who read company financial reports, the new standards grant them fair access to corporate transparency.
The new accounting standards come at a sensitive time for local companies rattled by a global financial crisis and an economic slowdown at home. While the revised rule will help increase competitiveness in the long term, among companies it has raised immediate concerns of higher inventory impairment losses and gross margin erosion, especially for companies exposed to low gross margins, falling product prices and high inventory turnover days.
On Thursday, the Presidential Office’s economic advisory committee suggested the government temporarily suspend implementing the rule, saying it would negatively affect companies’ bottom lines. Some business representatives also warned the new standards would cause banks to tighten access to credit for companies that report more inventory write-offs.
So far, both the Financial Supervisory Commission and the Executive Yuan have stuck to their guns, refusing to backtrack on their assertions that the new standards would increase financial transparency.
On a positive note, the financial regulator’s resistance to pressure from the Presidential Office and business circles will not create policy uncertainty in the market after the rule went into effect at the beginning of the year.
Moreover, the recent bickering between government officials and companies regarding the timing of the implementation should alert the general public and investors to the importance of inventories, while prompting more companies to act quickly and boldly to adopt the new standards.
The president’s economic advisers have the right to reflect companies’ concerns about the accounting standards, but the financial regulator’s job is to protect investors and maintain market order.
The real impact, if any, of the rule change might not be as significant as local media have suggested. Hopefully implementing the new standards will help restore the public’s confidence in listed companies’ financial books.
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