We serve privately held and family businesses, angel and venture-backed companies, public companies, foundations, not-for-profit and public sector organizations, and high net worth individuals and their families.
Accounting Update: Simplifying the Measurement of Inventory
Posted on Sep 14, 2015
By Hillary Parker, CPA
Recently, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2015-11 on simplifying the measurement of inventory. The purpose of the update was to:
Reduce cost and complexity
Provide users of financial statements more comparable information
Increase convergence to IFRS.
What’s changed, and what hasn’t
The primary provision of the amendment is to change the subsequent measurement guidance from the lower of cost or market, to lower of cost and net realizable value (NRV). This change eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin).
The FASB defined NRV as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. When evidence exists that the NRV of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. That loss may be required, for example, due to damage, physical deterioration, obsolescence, changes in price levels, or other causes.
The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. There are no other substantive changes to the guidance on inventory measurement.
Disclosure remains the same
As previously required, substantial and unusual losses that result from the subsequent measurement of inventory should be disclosed in the financial statements. The only disclosures required at transition are those related to the nature and reason for the change in accounting principle. No quantitative information is required to be disclosed.
When does this become effective?
The amendment is effective for fiscal years beginning after December 15, 2016 for public companies. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016. The amendments in this update should be applied prospectively, with earlier application permitted as of the beginning of an interim or annual reporting period.
This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.
Menu
≡
╳
