Crossovers, SUVs and the ripple effect on suppliers
INSIGHT ARTICLE |
It appears that 2017 is becoming the Year of the Truck and Crossover. Consumers are snapping up high-margin trucks, SUVs and crossovers instead of less-expensive sedans, creating record levels of profitability for the automakers. As of Sept. 30, 2017, the bestselling vehicles in the United States for the year were trucks, SUVs and crossovers. There was not one sedan in the top five (see table).
Sales mix is extremely important because a company's products vary in their profitability. Trucks, SUVs and crossovers are higher-margin vehicles, which benefit the automakers; sedans have historically generated lower margins. While the change in mix is benefiting the bottom line for the automakers, it is having a negative effect on parts of the supply chain. Suppliers tied to less-profitable sedan programs and not to the high-margin truck, SUV and crossover programs are facing razor-thin margins and declining volumes.
One accounting implication challenging suppliers is the impairment of long-lived assets. The Financial Accounting Standards Board Accounting Standards Codification Topic 360, Property, Plant, and Equipment (also known as ASC 360) addresses financial accounting and reporting for the impairment of long-lived assets and long-lived assets that are to be disposed. ASC 360 requires a company to recognize an impairment loss if―and only if―the carrying amount of a long-lived asset (or asset group) is not recoverable from the sum of the undiscounted cash flows expected to result from the use and eventual disposal of the asset, and if the carrying amount exceeds the asset’s fair value. If it is determined that an asset is impaired, the amount of the impairment is equal to the difference between the carrying amount of the long-lived asset and the fair value of the asset.
In order to perform a long-lived asset impairment analysis, the asset group needs to be determined. As defined in ASC 360-10-35-23, an asset group is the grouping of assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Many suppliers have identified the asset grouping as an individual plant. If the plant is tied to a specific, non-truck or crossover vehicle program (such as one for a sedan), the declining volumes tied to that specific program may result in situations where the sum of the undiscounted cash flows expected to result from the use and eventual disposal of the asset are less than the carrying value of the asset. If this is the case, an impairment needs to be recorded.
External auditors may require an independent appraisal or valuation be performed on a supplier’s machinery and equipment to determine the fair value of the asset. This will require lead time in order to engage an independent appraiser and to complete the necessary impairment testing prior to issuing annual financial statements.
Suppliers are facing potential impairments in 2017 related to the change in mix. Planning ahead and proactively managing the process will be essential.
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