FASB Proposes to Simplify Inventory Measurement

The Financial Accounting Standards Board has proposed a pair of Accounting Standards Updates aimed at simplifying the process of inventory measurement and eliminating the requirements for extraordinary items.

The proposals are part of FASB’s simplification initiatives, whose goal is to reduce cost and complexity in financial reporting while improving or maintaining the usefulness of the information reported to investors. 

One of the proposed updates addresses concerns about the complexity of the current guidance on measuring inventory. Under current U.S. GAAP, reporting organizations are required to measure inventory at the lower of cost or market. Market could be net realizable value, replacement cost, or net realizable value less a normal profit margin when measuring inventory.

The proposed guidance would require inventory to be measured at the lower of cost and net realizable value. It would eliminate the existing requirements to consider the replacement cost of inventory and the net realizable value of inventory, less an approximately normal profit margin. The proposed changes promise to reduce the cost and complexity of the subsequent measurement of inventory and result in greater consistency in the measurement of inventory.

The other proposed update seeks to reduce cost and complexity by eliminating the concept of extraordinary items. Under current GAAP, organizations need to evaluate whether an event or transaction is an extraordinary item and, if it is deemed so, to separately present and disclose the item. However, the concept of extraordinary items causes uncertainty because it is unclear when an item should be considered both unusual and infrequent, FASB noted.

The proposed update would remove the concept of extraordinary items from GAAP. FASB said it believes that eliminating the concept would save time and reduce costs for preparers who would not assess whether a particular event or transaction event is extraordinary. The proposal also is intended to alleviate uncertainty for preparers, auditors and regulators because auditors and regulators no longer would evaluate whether a preparer presented an unusual and/or infrequent item appropriately.
FASB expects that both of the proposed updates would be applied prospectively in annual periods, and interim periods within those annual periods, beginning after Dec. 15, 2015. Early adoption would be permitted.

The objective of FASB’s simplification initiative is to reduce cost and complexity in financial reporting while improving or maintaining the usefulness of the information reported to investors, FASB noted. As part of the ongoing initiative, FASB plans to its agenda a series of projects of narrow scope that stakeholders have identified as opportunities to simplify GAAP in a relatively short time period.

The exposure drafts—including instructions on how to submit comments by Sept. 30, 2014—are available at www.fasb.org. Stakeholders also can provide feedback by using the electronic feedback form available on FASB’s Web site.