As the Financial Accounting Standard Board (FASB) continues their focus on simplification, the Board voted in May of this year to finalize Simplifications on Subsequent Measurement of Inventory. The Board’s inventory measurement simplification objective is to reduce the cost and complexity of the subsequent measurement of inventory while maintaining, or improving, the usefulness of the information being reported.
How will this impact accounting?
Excluding LIFO and Retail methods of inventory accounting, current practice requires inventory to be measured at the lesser of cost or market price. The market price is generally measured as net realizable value bounded by replacement cost and net realizable value less an approximately normal profit margin. As a result of the exposure draft, a reporting entity would no longer be required to consider replacement cost when measuring inventory nor would it be required to consider net realizable value less an approximately normal profit margin. An entity would only by subject to evaluating the lesser of cost or net realizable value.
When is this expected?
The Board affirmed its proposal and will move forward with finalizing the exposure draft. The FASB determined that all entities are allowed early adoption beginning any interim or annual period. Public entities would be required to apply amendments in annual reporting periods beginning after December 15, 2016 (including interim reporting periods within that annual period), and nonpublic entities would be required to apply amendments in annual reporting periods beginning after December 15, 2016 (with interim reporting periods beginning after December 15, 2017).
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