Dreams of Lean Accounting Standards

Certain aspects of traditional accounting, driven by the generally accepted accounting principles (GAAP), have stymied the efforts of lean manufacturers for many years.  Perhaps of considerably more impact those principles create a perceived barrier in the eyes of many CFO’s.  The reality is that vast improvements can be made while complying with traditional accounting methods, but that perceived barrier prevents many companies, especially those that are public, from even starting down the lean journey.  One well-known example of a problem with GAAP is that inventory is considered an asset, where lean considers it a waste… a liability.

Yesterday there was a small article in the Wall Street Journal discussing how the U.S. and EU were going to streamline accounting standards by 2009.  My eyes lit up, and I immediately wondered if finally accounting standards were going to align to the realities of modern, especially lean, businesses.  A little research took me to a press release by the International Accounting Standards Board (IASB), which publishes the International Financial Reporting Standards (IFRS).  The press release discusses activities between the SEC and IASB to harmonize GAAP and IFRS.

The Commission anticipates issuing a Proposing Release this summer that will request comments on proposed changes to the Commission’s rules which would allow the use of IFRS in financial reports filed by foreign private issuers that are registered with the Commission. The approach in the proposed rule would be to give foreign private issuers a choice between IFRS and U.S. GAAP. In addition, the Commission plans a Concept Release relating to issues surrounding the possibility of treating U.S. and foreign issuers similarly in this respect by also providing U.S. issuers the alternative to use IFRS.

So basically both foreign and U.S. companies would have a choice between GAAP and IFRS beginning in 2009.  So… what is IFRS?  It turns out that PriceWaterhouseCoopers has a very informative website dedicated to the subject.  Detailed information on key financial aspects are covered via links on the left side menu… assets, liabilities, revenue, expenses, and the like.  And the application of IFRS to certain key industries, such as banking, retail… and automotive also have further detail. 

Automotive is probably the closest to general manufacturing, so let’s take a look at that page.  There’s a good discussion of the full value stream from raw material through aftermarket services.  Even the impact of kanban and just-in-time methods. But let’s try to find something specific, such as the inventory example we mentioned earlier.

A further search on the same website locates a page dedicated to the impact of IFRS on inventories.  And there we find what we’re looking for.

Inventories are assets: held for sale in the ordinary course of business; in the process of production for sale; or in the form of materials or supplies to be consumed in production or in rendering services [IAS2R.6].

Sigh…

But as we mentioned earlier, vast operational improvements can be realized even within the constraints of traditional accounting.  Unfortunately it appears lean manufacturing will continue to fight a problem of perception.  Perhaps the growing lean accounting movement will help improve the situation.