Manufacturing, Wholesale, and Distribution

While employment growth has been seen in the manufacturing industry, many manufacturers feel there could be much larger gains. In The Hill article, "Manufacturers urge lawmakers to help businesses grow," Vicki Needham reports that this is due to concerns about the health of the federal government and the nation’s current regulatory environment. Manufacturers believe they could be creating up to 20,000 new jobs monthly if they did not have to face all of the uncertainty. The biggest concerns are related to the regulatory environment and the impact from the new healthcare laws. Most manufacturers are still figuring out how the new laws are impacting their businesses. Until they know the exact impact, they will continue to be hesitant to hire.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

Is the United States on the verge of a manufacturing renaissance? The data from MarketWatch related to on-shoring and re-shoring would suggest exactly that! Since the end of the recession, the U.S manufacturing sector has added approx. 500,000 new jobs to the economy. This is the first time that the sector has seen growing employment since the mid-90s. Most research supports the idea that these jobs are coming from U.S. companies re-shoring their production back to the U.S. However, MarketWatch reports that foreign companies increasingly see the U.S. as a good outsource location for their production (on-shoring). In the end, it will be difficult to tell if this results in an overall net gain or an overall net loss of jobs for the U.S. But it is a good sign that U.S. manufacturing is starting to gain momentum again!

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

The U.S. Department of Commerce recently released a new study titled The Geographic Concentration of Manufacturing Across the United States, which presented some interesting information on U.S. manufacturing and Indiana’s role in the industry. Manufacturing has a strong influence on the overall U.S. economy, with 25% of GDP growth from 2009 to 2011 coming from the manufacturing sector. However, this is the first study that the Commerce Department has done on the geographic nature of the manufacturing industry. The findings reveal:

• In 2010, 629 counties (the U.S. has a total of 3,145) reported that 20% of total earnings came from the manufacturing sector.
  • Indiana ranked highest with 22.3% of the state’s earnings coming from the manufacturing sector (national average was 9.9%).
  • Indiana had the most counties included in the figure above (50 counties).
  • The study found that of the 629 counties noted above, 68% of them were located in rural or micropolitan areas.
• In 181 counties, 20% of all jobs in the county were manufacturing jobs.
  • Indiana had the highest percentage of its employment in the manufacturing industry, with 13.1% of employment relating to manufacturing jobs (national average was 7.0%).
  • Indiana had 26 counties that fell into this category.
  • Approximately 80% of these counties were located in rural or micropolitan areas.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

A recent article in the Council of Supply Chain Management Professionals’ Quarterly Supply Chain newsletter, "Three Trends to Watch in 2013," addresses what the council sees as the top trends to watch for in 2013.

1. Reshoring of Jobs: This is a concept that received a lot of attention in 2012 due to rising labor costs in foreign countries, quality issues and transportation costs. Additionally, there will be increased concerns in 2013 over the ongoing labor strikes that have occurred at many U.S. ports recently, which serves as a reminder that there are risks associated with manufacturing offshore. Finally, there is far more risk to an international supply chain than a domestic supply chain (the potentional for things like natural disasters or political upheavals are higher).
2. Rise of Demand-Driven Replenishment: The idea that manufacturers will use actual data from customers (i.e., point-of-sale systems at a retailer) to determine the amount of production that needs to occur.
3. “Big Data” Analytics: With modern technology, manufacturers are able to use much larger quantities of information in an efficient and timely manner. Access to this information provides new opportunities to improve efficiencies and eliminate bottlenecks in production.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

The Manufacturing Institute recently released the eighth edition of The Facts About Modern Manufacturing. The report highlights the importance of manufacturing not only to the U.S. Economy but to the global economy as well. In fact, the report claims that the U.S. manufacturing sector is the largest manufacturing sector in the world and is the eighth-largest economy in the world. Additionally, 57% of all U.S. exports are manufactured goods.

The report does point out a few areas of concern. First, U.S. manufacturing exports were more than three times that of China’s exports in 2000. However, in 2011, Chinese manufactured exports topped U.S. manufactured exports by 21%. Additionally, the U.S. manufacturing industry must complete with a 17.6% higher structural cost burden (incorporating tax liabilities, employee benefit costs, litigation costs and regulatory compliance costs) than its nine largest competitors. Finally, despite the increases in U.S. manufacturing over the past few years, the sector has seen a decrease in its market share of global exports from 19% in 2000 to only 14% in 2007.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

Indiana is one of 27 states in the United States whose economic health improved during 2012 due to growth in its manufacturing sector. According to the Bloomberg Economic Evaluation of States Index, Indiana was in the top eight for biggest gains in economic health. The Midwest states of Indiana, Ohio, Illinois and Michigan have an average manufacturing employment level of 13%, which is 4.1% above the national average of 8.9%. This shows the importance of manufacturing growth to each of these states. To learn more, read Bloomberg's article, States Gaining in Economic Health as Manufacturing Grows.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

Reuters released a recent reading of the U.S. Manufacturing Purchasing Managers Index, which showed an increase from 52.8 in November to 54.0 in December. December’s reading on the index is the highest reading since May 2012 and presents an indication that the manufacturing sector was growing at the end of 2012.  Any reading on the index above 50 is considered to be an indication of growth/expansion of the sector.

Additionally, a recent reading of the Institute for Supply Management’s index of national factory activity rose during December. The index increased from 49.5 in November to 50.7 in December. The November reading had been a 40-month low for the index, so the increase in December is considered to be a good indication that manufacturing is coming back.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

While the U.S. economy as a whole has struggled the past few years, manufacturing in the United States is starting to see some gains. Most of these gains are as a result of re-shoring jobs back to the United States that had previously been moved overseas for cheaper labor. 

Research by the Boston Consulting Group shows that increased cost of labor, increased natural gas costs, and increased electric costs have companies considering moving or actually moving production from Europe and Japan back to the United States.

Research conducted by Capital Business Credit shows that half of respondents polled are considering moving jobs back to the United States that had been moved over to China in prior years, with 30% of those respondents noting the United States as their top choice for relocation. The top reason sighted for the potential moves was the increase in labor costs in China. The increase in transportation costs to ship products back to the United States once completed was sighted as the second reason.

Additionally, a survey report from the Council of Supply Chain Management Professionals show that 40% of the companies they surveyed planned to move production from China and India back to the United States. This report noted that increases in energy costs, labor costs and transportation costs were driving factors. The report also noted that companies had concerns over the political stability of these countries, as well as product quality and their ability to protect their intellectual property.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

Manufacturing the future: The next era of global growth and innovation, a major report from the McKinsey Global Institute, sheds some light on the direction the manufacturing industry is heading. The study points out the following:

• Manufacturing is vital to the global economy. It helps to drive growth in local economies and helps to improve the standard of living across the global. However, the nature of manufacturing is changing. As an economy matures, the role of manufacturing in that economy must change as well. In an advanced economy, manufacturing must shift from focusing solely on job growth and GDP growth, to promoting innovation, productivity, and trade amongst other economies.
• Manufacturing is no monolithic. McKinsey has identified five board segments that manufacturers can be divided into: 1) Global innovation for local markets; 2) Regional Processing; 3) Energy/resource-intensive commodities; 4) Global technologies/innovators; and 5) Labor-intensive tradable
• The line between manufacturers and service providers is becoming more blurred with technology and advanced manufacturing.
• The role of manufacturing in job creation is changing as the industry shifts away from low-skilled workers to high-skilled works that can drive advanced manufacturing to a new level.
• As manufacturing shifts new opportunities will arise, but they will not be the same opportunities that have come in the past. Manufacturers must position themselves to look for and take on these new opportunities in a more complex and uncertain environment than the past.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

A recent study conducted by the Council of Supply Chain Management Professionals and Michigan State’s Department of Supply Chain Management shows that 40% of manufacturers surveyed perceive a trend of moving production back to the U.S. from off-shore sites such as China and India. Of the 319 total respondents, 38% reported that their direct competitors have already reshored operations back to the United States. The study also found that this trend is strongest in certain sectors of manufacturing, including aerospace and defense, industrial parts and equipment, and electronics.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

On November 1, 2012, the American Institute of Certified Public Accountants (AICPA) released for public comment the exposure draft Proposed Financial Reporting Framework for Small- and Medium-Sized Entities. The proposed Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) is designed for privately owned, for-profit entities that are not required to produce financial statements in accordance with U.S. GAAP.

The proposed FRF for SMEs is a special purpose framework (formerly referred to as other comprehensive basis of accounting) intended for use by privately-held small- to medium-sized entities in preparing their financial statements. The proposed FRF for SMEs follows the general principal that historical cost is the most useful measurement basis for the users of SME financial statements and the most cost-beneficial approach for management.

Some of the key features of the proposed framework include the following:

• Historical cost is the primary measurement basis
• Closely aligned with the accrual basis of accounting
• Disclosures are reduced, while still providing users with the relevant information
• Familiar and traditional accounting methods are used
• Adjustments needed to reconcile tax return income with book income are reduced
• Principal-based framework, usable across industries by incorporated and unincorporated entities
• Only financial statement matters that are typically encountered by SMEs are addressed in the framework

The FRF for SMEs is not proposed as an authoritative document, and the AICPA would have no authority to require the use of the FRF for SMEs. Use of the FRF for SMEs would be a choice made by management of the entity after considering the users of the financial statements.

Currently, the AICPA is asking for comments on the proposed framework. The comment period ends January 30, 2013. The AICPA has a resource page that provides additional information on the proposed FRF for SMEs.

The AICPA anticipates issuing a final framework in the first half of 2013.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

The Financial Accounting Standards Board (FASB) issued a proposed accounting standard update on August 16, 2012, related to the presentation of amounts that are reclassified out of accumulated other comprehensive income (AOCI). The full proposed ASU can be found on the FASB site.

The proposed update does not change the reporting of other comprehensive income but would require enhanced disclosures to present separately by component reclassification out of AOCI. A tabular presentation related to amounts reclassified out of AOCI for items required under U.S. GAAP to be reclassified directly to net income in their entirety would be required. For items not required under U.S. GAAP to be reclassified directly to net income in their entirety, the tabular disclosure would only include a cross-reference to other disclosures for those items. The updated presentation is designed to help provide a better reference to other disclosures that have additional information related to amounts reclassified out of AOCI. The proposed change is due to the FASB's cost/benefit analysis of its issuance of ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which was designed to increase the prominence of other comprehensive income in the financial statements.

The amendments in this proposed update would apply to all companies that issue financial statements in accordance with U.S. GAAP and that report items of other comprehensive income. The effective date will be determined after the FASB considers the feedback from the proposal.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

The FASB issued Accounting Standards Update No. 2012-05, Statement of Cash Flows (Topic 230): Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows on October 22, 2012. The update sets forth guidance on the classification of cash receipts from the sale of certain donated financial assets, such as investment securities, in the statement of cash flows. Prior to this ASU, Not-for-Profit (NFP) entities would classify these cash flows as either investing cash flows or as either operating or financing cash flows dependent upon how they classified cash inflows resulting from cash contributions.

Under this update, NFPs will classify the cash receipts from the sale of donated financial assets consistent with where the NFP classifies its cash donations received when the sales of the financial assets donated is nearly immediately converted to cash without any NFP-imposed limitations for the sale. Under this scenario, the cash flows would be recorded as an operating cash flow, as long as there is no donor restricted use imposed for long-term purposes. If there is a restriction imposed for the use for long-term purposes, then the cash receipts should be classified in financing activities. If the financial assets are not nearly immediately converted to cash, then at the time a sale does occur, the cash inflows will be classified as cash flow from investing activities for the NFP.

ASU No. 2012-05 is effective prospectively for fiscal years, and interim periods within those years, beginning after June 15, 2013. Retrospective application to all prior periods presented upon the date of adoption is permitted.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

In 2011, President Obama created the Advanced Manufacturing Partnership (AMP). In July 2012, the AMP released the Report to the President on Capturing Domestic Competitive Advantage in Advanced Manufacturing, which outlines 16 recommendations aimed at reinventing U.S. manufacturing. The AMP claims these recommendations will ensure global competitiveness, help feed the nation's innovative economy, and strengthen the domestic manufacturing base.

The recommendations are as follows:

1. Establish a National Advanced Manufacturing Strategy
2. Increase R&D Funding in Top Cross-Cutting Technologies
3. Establish a National Network of Manufacturing Innovation Institutes (MIIs)
4. Empower Enhanced Industry/University Collaboration in Advanced Manufacturing Research
5. Foster a More Robust Environment for Commercialization of Advanced Manufacturing Technologies
6. Establish a National Advanced Manufacturing Portal
7. Correct Public Misconceptions About Manufacturing
8. Tap the Talent Pool of Returning Veterans
9. Invest in Community College Level Education
10. Develop Partnerships to Provide Skills Certifications and Accreditation
11. Enhance Advanced Manufacturing University Programs
12. Launch National Manufacturing Fellowships and Internships
13. Enact Tax Reform
14. Streamline Regulatory Policy
15. Improve Trade Policy
16. Update Energy Policy

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

As the global economy continues to struggle with the European debt crisis, U.S. manufacturing is starting to feel the effects. Per a Fox Business article, Factory output up modestly, inflation looks in check, the Federal Reserve reported only a 0.2% increase in factory outputs for the month of September. While this was a gain for the month, it failed to balance out the decline that occurred in August (-.09%). However, inflation measures for September remained steady. 

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

A third-quarter survey conducted by the National Association of Manufacturers (NAM) and IndustryWeek shows that manufacturers are still concerned about the future of manufacturing and are anxious about the uncertainty facing the industry. Only 69.2 percent of respondents were somewhat positive or very positive about their company’s outlook. Unfortunately, this is a big step back from this year's first- and second-quarter surveys, which showed that 89 percent and 83 percent, respectively, of respondents were either somewhat positive or very positive about their company’s outlook.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

After three straight months of slight declines, the most recent Manufacturing Institute for Supply Management (ISM) Report on Business shows an uptick in September, showing that the manufacturing sector is, in fact, back on track. The September Purchasing Managers Index reading was up 1.9 percent over August, hitting 51.5 percent. A reading greater than 50 percent is considered to show that the manufacturing sector is growing and not contracting. ISM’s New Order Index has also risen in September to hit 52.3 percent, compared to 47.1 percent in August. Finally, ISM’s Employment Index showed improvement as well, hitting 54.7 percent in September, up from 51.6 percent in August.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

The Financial Accounting Standards Board (FASB) issued an exposure draft August 16, 2012, on a proposed accounting standard update related to the presentation of amounts that are reclassified out of accumulated other comprehensive income (AOCI). The full proposed ASU can be found on the FASB site and is open for public comment until October 15, 2012.

The proposed update would require enhanced disclosures to present separately by component reclassification out of AOCI and a tabular presentation related to amounts reclassified out of AOCI (for items note required under U.S. GAAP to be reclassified directly to net income in their entirety) all in one single disclosure. The updated presentation is designed to help provide a better reference to other disclosures that have additional information related to amounts reclassified out of AOCI. The proposed change is due to the FASB's cost/benefit analysis of its issuance of ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which was designed to increase the prominence of other comprehensive income in the financial statements.

For additional information on Comprehensive Income, see “Other Comprehensive Income Industry Comparisons,” located on page 6 of Katz, Sapper & Miller's newsletter, The Advisor.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

In July, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The objective of the amendment is to help simplify the impairment testing and to improve consistency in impairment testing of indefinite-lived intangible assets other than goodwill, such as licenses, distribution rights and trademarks. 

Previously, a company had to perform an annual impairment testing of an indefinite-lived intangible asset by comparing the fair value of the asset to its carrying amount on the books. If the fair value was determined to be below the carrying amount, then an impairment loss was recognized and the intangible asset was written down.

Under the amendment, a company is now able to perform a qualitative assessment first to determine whether a quantitative assessment of fair value would be needed. If the company’s qualitative assessment determines that it is "more likely than not" that the indefinite-lived asset is impaired, then the company is required to calculate the fair value and assess as before. If it is determined that the indefinite-lived asset is not "more likely than not" to be impaired, then the company is able to stop its assessment at that point.

The Accounting Standard Update goes into effect for all fiscal years beginning after September 15, 2012.

This guidance is similar to the guidance for goodwill impairment testing included in Updated No, 2011-08, Intangibles – Goodwill and Other.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

The Financial Accounting Standards Board (FASB) issued a discussion paper July 31, 2012, titled, Private Company Decision-Making Framework: A Framework for Evaluating Financial Accounting and Reporting Guidance for Private Companies, for invitation to comment on the development of a private company decision-making framework. The decision-making framework will set criteria for when U.S. GAAP should be modified to meet the needs of private companies.

Over the past year, the Financial Accounting Foundation (FAF) received a significant amount of pressure to create a separate standard-setting body for private company financial reporting. FAF created the Private Company Council (PCC) in May 2012, which will set its own agenda to discuss potential modifications for private companies. After applying the U.S. GAAP standard against a newly developed framework, the PCC would then vote on any proposed changes (which would be for private companies only). Assuming that the PCC vote passes the recommended change, it will then move to FASB for an endorsement. Once endorsed by FASB, the proposed change would be opened to public comment.

The discussion paper is an invitation to comment on a decision-making framework from which the PCC will determine when U.S. GAAP (as issued by FASB) should be modified or if a full exception is needed to meet  the needs of private company financial statement users. 

The development of a decision-making framework for private companies is intended to identify differential information needs of private companies and their users, and to reduce the costs and complexity of preparing U.S. GAAP financial statements. Preliminary FASB staff recommendations on the decision-making framework covers the following five areas in which financial accounting and reporting guidance might differ for private companies:

1. Recognition and measurement
2. Required disclosures
3. Presentation of information
4. Effective dates of new standards
5. The transition method used once a new standard has been issued.

The invitation to comment on the FASB discussion paper is seeking public comment (mainly from private company financial statement users and preparers) on the new framework until October 31, 2012.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.