Accounting For Shifts in Retail Supply Chain Practices

By Dean Sonderegger

Supply Chain PracticesRetailers and distributors are in the midst of a major shift. As consumer demand for instantly accessible online inventory and quicker delivery grows, industry leaders are being forced to alter their supply chain management strategies in ways that drive sales and meet customer expectations. In the wake of the shifting supply chain, U.S. retailers’ accounting practices need to evolve with these operational changes to properly track real estate, machinery and other assets, and to fully realize the financial benefits these shifts are intended to inspire.

Rethinking supply and demand

Keeping costs down is still paramount to retailers’ success, but many firms are focusing less on production and labor expenses, and more on the cost of transportation, proximity to consumer marketplaces, and supply chain efficiency and flexibility.  At the center of this trend is the rise of e-commerce, and retailers’ mission to find new ways to facilitate direct supplier-to-consumer transactions. To compete with the likes of Amazon, many national retailers including Sears and Best Buy are implementing strategies such as drop shipping and third party marketplaces, to offer consumers more product variety and faster fulfillment.

In time, many retailers may begin shedding their own warehouse space so they can invest in these more modern practices. Distributors and logistics firms on the other hand are acquiring more real estate, and working to modernize equipment in current facilities to keep up with the pace of online orders. A critical, but often ignored byproduct of these new supply chain practices is how they’re forcing the retail industry into a fixed asset-juggling act.

Tracking costs

As retailers and distributors acquire more assets to accommodate the evolving supply chain, it is necessary for firms to reliably track expenses and asset lifecycles. Current regulations and accounting guidelines around fixed asset reporting and depreciation make doing so an intricate feat. 

Mind the GAAP

The standard guidelines for financial accounting in the U.S. are referred to as the Generally Accepted Accounting Principles (GAAP). GAAP rules lay the framework for businesses as they prepare their financial statements and measure their organizations’ value. In recent years, however, there has been a debate over how accurately GAAP portrays true corporate worth.

Supply Chain PracticesBecause GAAP rules use historical asset costs as a baseline, and because they fail to account for assets that appreciate over time, adhering to GAAP structure alone may shroud companies’ view of their total value. Distributors and retailers that renovate or add on to existing warehouse and fulfillment space must be careful to capture this appreciation and replacement value in real-time.

Be proactive

In the midst of supply chain shuffles, retailers and logistics firms must also keep an eye on the fluctuating tax and accounting regulatory landscape. Late last year, the IRS released its final Tangible Property Repair Regulations, rules related to the disposition and capitalization of expenses paid to purchase, produce or enhance fixed assets, effective as of Jan 1, 2014. These new regulations make proper fixed asset reporting critical from a compliance perspective, leaving firms across industries scrambling over how to transition their accounting systems and internal procedures. Retailers especially should be mindful of these policies, and equip themselves with the necessary tools to track their own repair expenses.   

To take the headache out of asset management and depreciation intricacies, retailers and other supply chain firms should start reinforcing their own accounting resources. Aside from reevaluating internal methods, businesses may consider implementing fixed asset management technologies that integrate with the general ledger system, and offer a comprehensive, real-time platform for tracking their asset portfolio. Many of these systems automatically update in accordance with the most recent regulatory changes, and offer analytics to better inform long-term investment planning.

Retail chains, suppliers, and distributors are recognizing the need for new facilities and equipment to meet customers’ fulfillment demands. But as these companies acquire more land, facilities, and equipment, or invest in improving their current assets, growth hinges on whether or not these investments are properly accounted for.