The Consumer Marketplace and Retailers’ Shifting Accounting Needs

The retail landscape is shifting … fast.

Customers are driven by the need for instant gratification more than ever, expecting boundless product options at their fingertips and 24-hour (or less) delivery models. To compete with bellwethers like Amazon.com and even Google, companies are exchanging traditional distribution strategies for something more flexible, focusing less on labor and production and more on inventory and proximity to consumer marketplaces. Retailers and distributors, however, cannot make these adjustments in isolation. In order to successfully transform their sales and operations, organizations must modify their back-office tax and accounting practices accordingly.

The keystone of retailers new business strategy: finding ways to facilitate more direct supplier-to-consumer transactions. To accommodate new tactics such as drop shipping and third-party marketplaces, some big-box and e-commerce retailers are shedding their own warehouse space while distributors and logistics firms acquire more. In many cases, these firms are starting to modernize the equipment in current facilities to handle the swelling volume of online orders.

These emerging supply chain practices require the retail industry to invest in new fixed assets — commonly known as property, plant and equipment (PPE). This investment in turn casts a new light on the industry's need to accurately report and depreciate real estate, machinery and other assets. As suppliers and distributors funnel capital into new facilities and technology to meet fulfillment demands, sound accounting practices will be an underlying yet integral factor in guaranteeing a return on these investments and creating room for growth.

As the retail landscape shifts, so too will the tax and accounting methods required to properly valuate assets. U.S. retailers in the midst of updating their accounting practices to mirror changes in business operations should consider two recommendations:

1. Question the conventional. Over the years, U.S. organizations have consistently turned to the generally accepted accounting principles (GAAP) as the commonly held standards for financial accounting. These rules offer a foundation for prepping financial statements, but have recently come into question for their ability to show companies real values.

For supply chain organizations investing heavily in fixed assets to meet the shifting demands of both customer and client, GAAP may not be the most accurate measure of corporate worth. Given GAAP rules reliance on assets’ historical value — as opposed to asset appreciation — retailers looking to update existing properties or develop additional real estate should be wary. These firms would be wise to implement a second layer of asset tracking that captures appreciation, offering a more realistic view of the organization's value and better basis for future budgeting.

2. Don't be blind to the regulatory environment. Though new regulations take time to come to fruition, the effects of fluctuating tax and accounting policies stretch far and wide. Take, for instance, the IRS's Tangible Property Repair Regulations, which alter the way companies report expenses made to enhance and invest in fixed assets. Under these new rules, compliance continues to be king, but also becomes a more complex undertaking. Many firms, retailers and distributors included, must quickly revamp their current accounting methods from people, processes and technology perspectives to capture these repairs.

Retailers and logistics companies are smart to pursue supply chain investments in order to satisfy today's consumer demands. The smartest firms, however, will be the ones which start correctly accounting for these assets — sustaining their growth potential for tomorrow.

Dean Sonderegger is the executive director, product management, at Bloomberg BNA, Software Segment.