Are you up to speed on ASU 2015-11 Simplifying the Measurement of Inventory? This post assists in understanding the new accounting measurement for inventory.
ASU 2015-11 requires that entities measure inventory at the lower of cost or net realizable value (LCNRV), provided they don’t use the last-in-last-out method (LIFO) or the retail inventory method. Entities using LIFO or the retail inventory method will continue to use the lower of cost or market (where market is replacement cost). Entities using the first-in-first-out (FIFO), average cost, or any other cost flow methods (other than LIFO and the retail inventory methods) should use the lower of cost or net realizable value approach.
So, where applicable, market is being replaced by net realizable value.
The Financial Accounting Standards Board’s glossary defines net realizable value as follows:
Estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Why the change? FASB is working to simplify some accounting standards. FASB had received comments from stakeholders that the requirement to subsequently measure inventory was “unnecessarily complex because there are several potential outcomes.”
Why did FASB not require the LCNRV method for all entities? The summary section of ASU 2015-11 says, “The Board 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…Therefore, the Board decided to limit the scope of the simplification to exclude inventory measured using LIFO or the retail inventory method.”
BC16 of ASU 2015-11 states the following:
The Board decided that the only disclosures required at transition should be the nature of and reason for the change in accounting principle. The Board concluded that the costs of a quantitative disclosure about the change from the lower of cost or market to the lower of cost and net realizable value would not justify the benefits because a reporting entity would be required in the year of adoption to measure inventory using both existing requirements and the amendments in this Update, and because the change would not be significant for some entities.
An entity is required only to disclose the nature and reason for the change in accounting principle in the first interim and annual period of adoption.
Here is a sample disclosure from Mercer International Inc.’s 10-K:
Accounting Pronouncements Implemented
In July 2015, the FASB issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory (“ASU 2015–11”) which requires that inventory within the scope of this update, including inventory stated at average cost, be measured at the lower of cost and net realizable value. This update is effective for financial statements issued for fiscal years beginning after December 15, 2016. The adoption of ASU 2015–11 did not impact the Company’s financial position.
Here is a sample disclosure from Delta Apparel, Inc.’s 10-K:
Recently Issued Accounting Pronouncements Not Yet Adopted
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, (“ASU 2015–11“). This new guidance requires an entity to measure inventory at the lower of cost and net realizable value. Currently, entities measure inventory at the lower of cost or market. ASU 2015–11 replaces market with net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured under last-in, first-out or the retail inventory method. ASU 2015–11 requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early application is permitted. ASU 2015–11 will, therefore, be effective in our fiscal year beginning October 1, 2017. We are evaluating the effect that ASU 2015–11 will have on our Consolidated Financial Statements and related disclosures, but do not believe it will have a material impact.
Here is a sample disclosure from Dr. Pepper Snapple Group, Inc.’s 10-K:
For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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