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financial statements

FASB Simplifies Guidance for Inventory Measurement

Jul 27th 2015
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As part of its simplification initiative, the Financial Accounting Standards Board (FASB) issued new guidance on July 22 that is intended to make the measurement of inventory in financial statements less complex.

Stakeholders told the board that guidance on the subsequent measurement of inventory is unnecessarily complex because there are several potential outcomes. Inventory (Topic 330) currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin, according to the FASB.

Under Accounting Standards Update No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory, the FASB decided to exclude inventory measured using last-in, first out (LIFO) or the retail inventory method, after stakeholders said there could be significant transition costs. Instead, the amendments apply to all other inventory, including inventory measured using first-in, first out (FIFO) or average cost. Stakeholders said inventory measured using FIFO or average cost would reduce costs and increase comparability.

The new guidance states that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.

In addition, the FASB amended some of the other guidance in Topic 330 to more clearly articulate the requirements for the measurement and disclosure of inventory. However, the board does not intend for those clarifications to result in any changes in practice.

For public business entities, the amendments will take effect for fiscal years beginning after Dec. 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments take effect for fiscal years beginning after Dec. 15, 2016, and interim periods within fiscal years beginning after Dec. 15, 2017. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period.

The FASB launched its simplification initiative in June 2014, with the objective of identifying, evaluating, and improving areas of US Generally Accepted Accounting Principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to financial statement users.

Related article:

FASB Launches New Initiative to Reduce GAAP Complexity


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