It’s an unfortunate circumstance when a manufacturer, importer or dealer is the victim of a robbery, but what about loss arising from inventory discrepancies? FFLs have had a long-standing obligation to report “timely,” but what exactly does that mean and what does an “inventory” entail? 

Let’s start by differentiating between the concepts of an “Inventory Balance” and your Book of Acquisition and Disposition (the “A&D Book”) – they aren’t the same thing.

Your inventory balance is a financial (and operational) metric that provides the quantity of units by part number and sometimes unit cost and location. It represents unserialized and serialized assets that reside on or off premise but owned by the Company. For example: A spring is not serialized and may be held at one of your subcontracted manufacturers but remains in your inventory balance. It’s simply at another location. Further, your inventory balance may include serialized or unserialized Raw Materials, Work in Process (WIP), Finished Parts, Subassemblies, or Finished Goods. In most cases, your inventory balance will not include items that you don’t legally or financially own. Such examples include finished goods being repaired on behalf of a customer. Or, a manufacturer’s inventory held on consignment at a dealer pending a sale.

On the other hand, your A&D Book lists those serialized assets that are in an “Open Disposition” status. That is, they have not yet been disposed from your A&D Book. Open Dispositions represent the serialized assets that you maintain physical control of, on or off of your licensed premise. This typically contains serialized WIP, serialized Finished Parts, serialized Subassemblies or a dealers’ serialized Finished Goods. It does not necessarily equate, from an accounting standpoint, to the assets that you financially own. For example, if a customer mailed a firearm to your licensed FFL for repair and it was on-site for two weeks, you would likely not include that in your financial inventory balance. However, you would be obligated to record that asset in your A&D Book as an acquisition until it was later disposed.

The following are illustrative examples of Open Dispositions.

• Firearm received from a Distributor by a Dealer and into it’s inventory for the purpose of sale
• Firearms received for repair (acquired) and are on premise overnight as part of the repair or Gunsmithing process.
• Firearms held by your traveling sales team, for bonafide business purposes, on or off-site, in accordance with ATF Ruling 2010-1.
• Firearms, (including frames and receivers thereof), serialized during the manufacturing process (acquired) and not yet assembled, scrapped or transferred to other licensees or non-licensees. 

Clearly, the management of inventory and the identification of discrepancies requires strong collaboration between different business functions. The same is true in any product-based industry, but the emphasis on accuracy is heightened when the entity has a regulatory obligation to maintain accurate records. Keeping your FFL in good standing can be aided with basic internal controls and periodic reconciliations of serialized products to both your A&D Book and your inventory balance.

For years (or even centuries) operations and accounting personnel have reconciled their inventory balance through cycle counts, monthly counts and in many cases annual full physical inventories. And now, best-in-class FFLs are doing the same for their serialized assets in accordance with Orchid’s analysis model (ref: Serialized Inventory Analysis for the Firearms Industry – Ten Steps That Will Make a Difference Today). Others are beginning to following suit quickly. 

In the accounting world, we call that good financial reporting control. In the operations world, we call that good inventory control to meet customer demands or production. In the compliance world, we call that an output of the above. One could argue that ATF compliance, at least in this respect, is achievable with basic management principles.

In a financial or operational inventory, the Inventory Balance is usually trued up that day, that weekend or even the next week. The timing of which is usually dictated by the nature of the inventory, be that a routine cycle count or a year-end financial inventory. The point is, errors are identified, managed and correctly quickly before the inventory balance physically changes and reconciliation becomes significantly more difficult.

Must we follow similar suit in Serialized Inventory activities? Yes, and “timely.”

The definition of the word “timely” has been written, verbalized and whispered in the hall. The intent of the regulation is to provide members of law enforcement with notice to carry out their duties as-soon-as-possible.

27 CFR 478.39a states, “A theft or loss of firearms must be reported to your local police as well as to ATF within 48 hours after the discovery. Licensees should notify ATF on the 24-hour, 7 days a week toll free line at 1-800-800 3855 and by preparing and submitting ATF Form 3310.11, Federal Firearms Licensee Theft/Loss Report. Theft or loss of NFA firearms should also be reported to the NFA Branch immediately upon discovery.” 

The regulations seem very clear. But, what if the process to “discover” requires communication with your customer, freight company or even requires a thorough search of a mega warehouse?

Well, there you have a Catch 22. Report too soon and you’ve rung a bell; don’t report soon enough and you can be cited for a violation. So, what is the answer?

• Report in accordance with 27 CFR 478.39a.
• Practice good inventory management principles including well designed internal controls at key acquisition and disposition points.
• Perform serialized inventories at regular intervals to identify discrepancies before they become too large. And even more important, identify process and system deficiencies early.
• Implement a strong “issue” escalation program rising to the highest levels of your organization. The level should be dependent on where in the organization critical decisions can be made.
• Understand and follow the regulation. If you have questions, ask the ATF. And, maintain a good working relationship with the ATF.

What’s important to remember is that “timely” applies “equally” to suspected theft or from inventory analysis discrepancies. And, while there isn’t a federal requirement to conduct an annual (or even quarterly) serialized inventory, if you do so, the requirement to report comes with the same reconciling benefits and the same compliance risks.

If you need help with this, please contact Orchid Advisors.