A Look Ahead…
As part of the Financial Accounting Standards Board’s (FASB) Simplification Initiative, FASB issued Accounting Standards Update (ASU) No. 2015-11 – Inventory (Topic 330) on July 22, 2015.
ASU No. 2015-11 requires an entity to measure inventory at the lower of cost or 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.” Current FASB standards require inventory to be measured at the lower of cost or market. FASB agreed with the stakeholders that standards were unnecessarily complex. Market could be the replacement cost of the inventory, the net realizable value of the inventory, or net realizable value less normal profit margin on the inventory.
Other than the proposed change from lower of cost or market to lower of cost or net realizable value, other guidance regarding the measurement of inventory would not be affected by this proposed change. The ASU applies to all inventory except inventory that is measured using the last-in-first-out (LIFO) or the retail inventory method.
The amendments in the update are effective for fiscal years beginning after December 15, 2016 and interim periods within those years for public companies. The effective dates for all other entities are fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. The amendment should be applied prospectively with earlier adoption permitted.
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