To Inventory Or Not?
That's the Big Question

New accounting guidelines applicable for fiscal periods starting since January 1, 2008, have been introduced for the valuation of inventories. The rules apply to all companies including manufacturers and may apply to importers/distributors where the design and coordination of the manufacturing process is the responsibility of the company. The new rules require that direct and indirect costs attributable to bringing the goods to their current state and available for sale must be included in cost of goods sold and in the valuation of inventory.

Valuation of inventories, until now, for a domestic manufacturer, would normally only take into account the actual cost of the item: raw materials, conversion costs including labour, labelling, packaging and optionally a factor for overhead. Overhead costs which include design, sampling, rent and utilities, insurance and any other expenses related to the manufacturing process must now be allocated among the units produced based on normal production levels. Costs related to the warehousing and distribution of finished goods are not to be included in inventory cost and cost of sales.

Importers, on the other hand, generally receive all of their merchandise “ready for sale” and the value of these goods would include: supplier invoice, freight, foreign exchange, duties and bank charges. The new rules now require importers to apply overhead costs in the same manner as manufacturers since it is management’s decision to use overseas suppliers rather than manufacture domestically.

The guidances deal with the periodic write down of inventory. Inventory must be written down on an item-by-item basis for those items that management believes it can sell at some price below the original cost. We call this the lower of cost and net realizable value. Management, however, is no longer permitted to deduct a normal profit margin in its determination of net realizable value and hence cannot write down inventory to less than what it believes is the lowest possible selling price. Furthermore, in future periods, should any items, which have been written down be saleable at a higher price, the guidelines require inventory to be written back up to no more than its original cost.

The financial statement disclosure requirements have been broadened to include:
• a breakdown by category of inventory [raw materials, work in process and finished goods]
• cost of goods sold
• amounts of write downs taken and the reasons for the write downs
• amounts of reversal of previous write downs and reasons for their reversal

Application of the rules are mandatory for fiscal periods beginning on or after January 1, 2008 and earlier adoption is possible. For companies who wait to adopt the new guidelines, management may have to revalue opening inventory to comply with the basis of valuation of the current year. Management will have the option to restate the previous year’s financials or restate their opening retained earnings for any resulting adjustments in opening inventory. Disclosure of the effects of adopting the new rules is also required.

For more information, please contact Mark Bindman, CA at (514) 908-3614 or mbindman@bgk.ca or Alison Miller, CA at (514) 908-3626 or amiller@bgk.ca.

The Alter Ego Trust: An Idea Whose Time Has Come

The Alter Ego Trust and its close cousin the Joint Partner Trust are very powerful tax planning tools for taxpayers age 65 and older. The Alter Ego Trust is a creation of tax law designed to allow an individual to transfer assets into the trust on a tax deferred basis. The Joint Partner Trust allows those assets to be placed into trust for the benefit of two spouses or partners.

The assets placed into the trust on inception benefit from a tax-deferred rollover, and no tax is payable at that time. The assets appreciate in the trust without immediate tax consequences. Only those assets that are paid or transferred out of the trust become taxable. This will happen at the latest on the death of the holder of an Alter Ego Trust, and the death of the last surviving spouse holder of a Joint Partner Trust.

This trust arrangement is very powerful, since it puts off the payment of tax on those assets, potentially for many years. The Joint Partner Trust allows two spouses to hold trust property until the death of the second spouse. That avoids the taxation on death of each individual spouse of their capital assets, such as stocks, mutual funds, and real estate. It also allows for some succession planning, since the trust is a separate entity that names its own beneficiaries.

Any taxpayer considering such a trust arrangement should also realize that a principal residence and Registered Retirement Savings Plans do not belong in a trust, since they already benefit from preferential tax treatment. However, any other capital assets may benefit from being placed into such a trust.

BGK would like to thank Andrew Kertzman, B.S.c., L.L.B. for his contribution of this article. For more information, please contact: Sydney Berger at (514) 908-3603 or  sberger@bgk.ca.

Search Engines: Searching for Success

Any Web site development or enhancement strategy today must address search engines. In the Internet’s early days, simply repeating a few key words and phrases could be enough to give your site a high search engine ranking.

But Google, Yahoo! and the other engines have become much more sophisticated. Their formulas – called algorithms – continue to evolve so successful placement today doesn’t guarantee performance tomorrow.

However, following a few basic rules can help:

• Two or three repetitions of key words and phrases, especially toward the top of the home page, does still help with search engine placement. A professional writer can help incorporate this text in a way that sounds natural.

• Make sure page titles – the words that appear at the top of the browser screen after the name of your browser software – are as specific as possible and include useful keywords.

• Search engines ignore Flash content - so do not use Flash animations to communicate critical information that you want the search engines to see.

Changes you make to your site to improve your rankings may take a month or so to have an impact. You also may want to consider buying key words or phrases through the advertising programs search engines offer.

For more information, please contact Dan Marcus at (514) 908-3611 or dmarcus@bgk.ca.

BGK Briefings

• BGK proudly congratulates firm member, Jean-François Senecal, on his authoring a tax article that will be published in the STRATÈGE magazine. STRATÈGE is a magazine published by APFF that is read by the Quebec tax community. The article will appear in the March issue of the magazine under “TPS et TVQ : rétrospective des changements survenus en 2008 et impacts pour le praticien”. We thank J-F for his fine efforts and journalistic skills. To obtain a copy of this article, please contact the author at jfsenecal@bgk.ca.

• A warm welcome is extended to firm newcomers Muhammed Dana from the John Molson School of Business and Martin Chicoine from HEC Montreal. Our 2008 summer students, Jonah Lewis from the John Molson School of Business and Samantha Gillespie from McGill, have returned permanently. We are thrilled to have Elise Rossignol rejoin BGK’s audit group after a seven year leave to raise her young family and Nicolas Wardropper will be full-time with our tax group this season. We are most fortunate to have these very talented people in the BGK family to assist us in delivering enhanced client service.

• Partner Clifford Herer, CA has taken to the airwaves. Clifford is a regular guest and contributor on CJAD’s Dave’s World with Dave Fisher on Sunday mornings. His guest spots, during which he discusses various business and accounting topics, occur monthly. Check out www.bgk.ca to learn the dates of his upcoming appearances.
 

Second Thoughts

“If you want your life to be a success story, then begin by realizing that you are the author and everyday you have the opportunity to write a new page.”

Mark Houlahan