Changes to simplify the measurement of inventory
FINANCIAL REPORTING INSIGHTS |
Generally accepted accounting principles historically have required reporting organizations to measure inventory at the lower of cost or market. When measuring inventory, “market” could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, to address concerns about the complexity of its guidance on measuring inventory.
ASU 2015-11 does not apply to inventory measured using the last-in, first-out method or the retail inventory method. The ASU applies to all other inventory, which includes inventory measured using the first-in, first-out method or the average cost method. Inventory within the scope of ASU 2015-11 now is required to be measured at the lower of cost and net realizable value. Net realizable value is defined as “the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.”
For public business entities, ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The ASU should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.