The Financial Accounting Standards Board has issued an accounting standards update to simplify the measurement of inventory.
The update is part of FASB’s simplification initiative, which aims to improve areas of GAAP for which cost and complexity can be reduced while maintaining the usefulness of the information provided to users of financial statements.
FASB heard from stakeholders that the existing guidance on the subsequent measurement of inventory is unnecessarily complex because there are several potential outcomes. Topic 330, Inventory, 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 minus an approximately normal profit margin.
FASB said an entity should measure inventory within the scope of the update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, minus reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.
The amendments in the accounting standards 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, including inventory that is measured using first-in, first-out (FIFO) or average cost. FASB received feedback from stakeholders that the proposed amendments would reduce costs and increase comparability for inventory measured using FIFO or average cost but potentially could result in significant transition costs that would not be justified by the benefits for inventory measured using LIFO or the retail inventory method due to the complexity inherent in those methods. Therefore, FASB decided to limit the scope of the simplification to exclude inventory measured using LIFO or the retail inventory method.
The amendments in the update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards, according to FASB. IFRS does not allow for the use of LIFO.
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