FASB Launches New Initiative to Reduce GAAP Complexity

Based on recommendations from stakeholders, the Financial Accounting Standards Board (FASB) will now tackle two short-term projects as part of a new effort to make US accounting rules less complex.

The recently launched initiative involves the FASB adding narrow-scope projects to its agenda that were identified by stakeholders as areas where US Generally Accepted Accounting Principles (GAAP) could be simplified in a relatively short period of time.

According to the FASB, the projects included in the initiative are intended to improve or maintain the usefulness of the information reported to investors while reducing costs and complexity in financial reporting.

“We have received many suggestions from stakeholders highlighting areas in GAAP where simplification might be achievable,” FASB Chairman Russell Golden said in a written statement. “We believe we could reduce cost and complexity in many of those areas and will work to prioritize the opportunities. The board added these two agenda projects based on stakeholder feedback, representing the beginning of our simplification initiative.”

The FASB added the two projects – simplifying the measurement of inventory and simplifying income statement presentation by eliminating extraordinary items – to its agenda at its May 28 board meeting.

For its first project, simplifying the measurement of inventory, the board tentatively decided that inventory should be measured at the lower of cost and net realizable value. Current accounting guidance indicates that organizations should consider net realizable value, replacement cost, and net realizable value less a normal profit margin when measuring inventory.

For its second project, simplifying income statement presentation by eliminating extraordinary items, FASB members tentatively decided to remove the extraordinary items concept from US GAAP. Current accounting rules require organizations to evaluate whether an event or transaction is an extraordinary item; and if it is an extraordinary item – to separately present and disclose the item.

Stakeholders who have suggestions and potential solutions to simplify existing US GAAP for all public companies, private companies, not-for-profit organizations, and employee benefit plans can e-mail their suggestions to fasbcomments@fasb.org.

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