Are you accounting for your core inventory correctly?
INSIGHT ARTICLE |
Remanufacturers rebuild used products to meet or exceed the specifications of the original manufactured product by using a combination of reused, repaired and new parts. The basic concept of remanufacturing is easy to understand; however, the activity is quite complex.
In the remanufacturing process, a used product (the core) is completely disassembled and its actual condition is assessed. Cores are the major raw material of a remanufacturer. A remanufacturer’s livelihood depends on securing the proper quantities and types of cores in its inventory. Remanufacturers usually obtain cores by purchasing them from a broker, or other remanufacturer, or through an exchange with a customer for a remanufactured part. If it appears that the core can be remanufactured successfully, various parts of the product are cleaned, restored, repaired and/or replaced. Refinements are then performed and the product is reassembled so that it once again operates as if the core were a new product. The product is then ready to be used again.
Cores can present operational, accounting and tax complexities for remanufacturers because the contractual terms for cores can vary greatly from transaction to transaction. But little guidance exists in the accounting literature on how to treat cores under generally accepted accounting principles (GAAP).
The methods of accounting for cores can vary by company and some methods of accounting for cores can create controversy with lending institutions, independent auditors, the IRS and the SEC. Valuation of cores and the accounting for core liability are the areas of greatest contention. There have been many instances in which core accounting disputes have caused the failure of a sale of a business or the revision of financial statements. In addition, tax treatment of cores generally varies from the method used for GAAP, which can cause controversy with the IRS. Cross-border transfer of core inventory can cause transfer pricing and customs challenges as well.
Remanufacturers should review their methods of accounting for cores for financial statement and tax purposes to ensure that the methodologies employed are appropriate and supportable. They will also need to reassess their accounting treatment of cores under the newly issued revenue recognition rules.