MANUFACTURING INSIDER

VOLUME 9 : : ISSUE 2

In This Issue:

Inventory And Net Realizable Value Changes Now In Effect

North American Automotive Production Forecast Summary - Q1 2017

Current State Of The Manufacturing Industry

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INVENTORY AND NET REALIZABLE VALUE CHANGES NOW IN EFFECT

In 2015, the Financial Accounting Standards Board issued Accounting Standards Update Simplifying the Measurement of Inventory (ASU 2015-11). This standard simplifies the subsequent measurement of inventory by replacing the “lower of cost or market” test with a new “lower of cost and net realizable value test.” However, entities that use the LIFO or retail inventory

margin (floor). The new guidance looks to reduce the multiple possible outcomes and more closely align with International Financial Reporting Standards by comparing inventory cost to only one measure, net realizable value.

methods, will continue applying their current impairment models.

Current standards require inventory to be measured at the “lower of cost or market,” with the calculation of market taking a “ceiling” and “floor” into account. With this consideration market could be either net realizable value (ceiling), replacement cost, or net realizable value less a normal profit

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This new guidance does not change the existing calculation used to find net realizable value, which is defined as the “estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation,” nor does it change any other areas of the accounting for inventory.

Example – “Lower of Cost or Market” vs. “Lower of Cost and Net Realizable Value”On September 1, 2017, a distributor purchased 500 units for $250 each and listed them at a selling price of $300. All 500 units were held in inventory as of the year ended December 31, 2017. On November 1, 2017, the manufacturer that built the units reduced their selling price to $200 per unit. With this price reduction, the distributor reduced their selling price to $275 in order to match their competitor’s pricing. Assuming there were no costs for completion, transportation, or disposal, the cost of inventory would be calculated as follows:

Current Standard – “Lower of Cost or Market”Net realizable value (ceiling) = $275Replacement cost = $200Net realizable value less a normal profit margin (floor) = $200 Normal profit = $275 - $200 = $75 Normal profit % = $75/$275 = 27.27% 27.27% x $275 = $75 $275 - $75 = $200

In the above example the replacement cost would be the market value as it falls between the upper and lower limit. There would be a lower of cost or market adjustment of $50.

New Standard – “ Lower of Cost and Net Realizable Value”

Using the same values as the above example, inventory would be valued at the lower of cost ($250) and net realizable value ($275). As cost is lower, no inventory adjustment would be recorded.

This guidance is effective for interim and annual periods beginning after December 15, 2016 for all public entities. For private entities, the guidance is in effect for all annual periods beginning after December 15, 2016 and interim periods during the fiscal years beginning after December 15, 2017. This guidance should be applied prospectively and can be early adopted. During the period of adoption, all entities must disclose the nature and reason for the change in accounting principle.

For more information regarding the new inventory standard, please contact your professional at UHY LLP in Detroit 313 964 1040, Farmington Hills 248 355 1040, or Sterling Heights 586 254 1040, or visit us on the web at www.uhy-us.com.

Michelle Moore, Principal (Sterling Heights, MI)

GDP GROWTH

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Summary includes economic outlook, light vehicle sales outlook, current production drivers, production capacity and long-term trend, model launches and investments.

NORTH AMERICA ECONOMIC OUTLOOK• US – Stock valuations and confidence are inflated by promised fiscal stimulus and deregulation, but private sector outlays remain

cautious. Solid fundamentals continue to support consumer spending, but inflation is taking a bigger bite out of real disposable income.

• Canada – Canada will benefit from rising shale gas and oil output. However, a vast outstripping of global supply trends relative to demand will lead to less vigorous activity in Canada’s energy sector in the short term.

• Mexico – Potential growth should average 2.4% pa over the next decade. Forecasted reduction from recent growth results from less optimistic outlook for US and the global economy, risk of secular stagnation in some advanced economies, domestic austerity measures, and a tighter monetary policy.

NORTH AMERICAN AUTOMOTIVE PRODUCTION FORECAST SUMMARY - Q1 2017

Source: Oxford Economics, LMC Automotive

GDP GROWTH

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NORTH AMERICA LIGHT VEHICLE SALES OUTLOOK

CURRENT NA PRODUCTION DRIVERS

Source: LMC Automotive

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NORTH AMERICA PRODUCTION AND CAPACITY LONG-TERM TREND

NORTH AMERICA PRODUCTION – MODEL LAUNCHES

Source: LMC Automotive

• North America demand is expected to plateau at a high level, adding stability throughout forecast horizon.

• Localization and exports drive production expansion, with Mexico adding 1.2mn units from 2016 level. Even with substantial investment, utilization holds at 85%. Production in US adds over 50k units, but stronger growth projected beyond 2020. Canadian output is expected to contract.

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INVESTMENT POURS INTO NORTH AMERICA

Investment in Mexico:• BMW – San Luis Potosi• Daimler – Aguascalientes (COMPAS) w/ Renault-Nissan• FCA – Toluca• Ford – Hermosillo• GM – San Luis Potosi, Silao• Hyundai – Monterrey• JAC – Hidalgo• Renault-Nissan – Aguascalientes 2 & COMPAS• Toyota – Guanajuato, Baja• Volkswagen – San Jose Chiapa

Investment in the USA:• Daimler – North Charleston (DG) 2• Faraday Future – North Las Vegas• FCA – Belvidere• Ford – Flat Rock Assembly• Fuji Heavy – Lafayette• Geely – Ridgeville• GM – GM Van, Flint Truck, Fort Wayne Truck, Spring Hill• Honda – Greensburg• Hyundai – Montgomery• Lucid – Casa Grande• Navistar – Springfield• Tesla – Fremont (Tesla)• Toyota – Tupelo• Volkswagen – Chattanooga

Source: LMC Automotive

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CURRENT STATE OF THE MANUFACTURING INDUSTRY

According to a new Standard & Poor’s report there are two key indicators that will tell you what kind of shape the manufacturing industry is in. The first is the Institute for Supply Management’s manufacturing purchasing manager’s index and the second is the Federal Reserve’s Capacity Utilization Index for motor vehicles and parts. A reading above 50 percent for the ISM index indicates that manufacturing is expanding in the US, and below 50 means that it is contracting. History shows that each time since 1983 that the index fell below 43 percent “speculative grade” automotive companies began to panic. Similarly any time the Fed’s utilization rate dropped below 72 percent during that period, it caused stress to automotive companies. Let’s take a look at where we stand as of March 2017.

ISM Purchasing Managers Index: 57.2%

Fed.Capacity Utilization Rate: 75.6%

History shows that each time since 1983 that the index fell below 43 percent “speculative grade” automotive companies began to panic.

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Our firm provides the information in this newsletter as tax information and general business or economic information or analysis for educational purposes, and none of the information contained herein is intended to serve as a solicitation of any service or product. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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