FASB finalizes simpler way to measure some inventory

FASB finalizes simpler way to measure some inventory

The Financial Accounting Standards Boards has finalized its simplification of the accounting requirements around measuring inventory, although the simplification is not as broad-based as originally intended.

 FASB has approved Accounting Standards Update No. 2015-11 to adjust the requirements in Topic 330 of the Accounting Standards Codification around measuring the value of inventory. The update says when performing subsequent measurements of inventory under either the first-in, first-out or the average costs methods, companies should measure inventory at cost, or at net realizable value, whichever is lower. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less any reasonably predictable costs of completion, disposal, and transportation.

 Previously GAAP specified subsequent measurements should be at the lower of cost or market, which included net realizable value but also replacement cost and net realizable value adjusted for normal profit margin. That led to complexity and varied outcomes, stakeholders told FASB, prompting FASB to consider an easier way.

 The update does not apply as originally intended to inventory measured under other methods, such as the last-in, first-out method or the retail method. FASB says it heard concerns from those who commented on the proposal that applying the simplification to those methods would actually make things more complicated and costly because the methods themselves are already complex enough. With the update, FASB also provided some new language in Topic 330 to more clearly articulate the requirements for measuring and disclosing inventory. However, FASB points out: “the board does not intend for those clarifications to result in any changes in practice.” Aside from the changes in subsequent measurement for two inventory measurement methods, “there are no other substantive changes to the guidance on measurement of inventory,” FASB wrote.

 FASB says the amendments move inventory measure methods in U.S. GAAP in closer alignment with the requirements in International Financial Reporting Standards. For public companies, the new guidance takes effect for fiscal years beginning after Dec. 15, 2016.

[cryout-button-color url=»http://incp.org.co/Site/2015/publicaciones/eglobal/accounting-standards-update-no-2015-11.pdf» color=»#47AFFF»] Accounting Standards Update No. 2015-11[/cryout-button-color]

 Source: Compliance Week – By Tammy Whitehouse

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