On July 22, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-11, Simplifying the Measurement of Inventory. This ASU applies to inventory measurement under all cost methods other than the LIFO and the retail methods.
Currently, under all cost methods, inventory is measured in the financial statements at the lower of cost or market (LCM). Market is the current cost to replace inventory, subject to certain limitations. Market should not (1) exceed a ceiling equal to net realizable value (NRV) or (2) be less than a floor equal to NRV minus an approximately normal profit margin. Accordingly, under current U.S. GAAP, three measures should be calculated: (1) Replacement cost, (2) NRV, and (3) NRV minus normal profit margin.
Under the new ASU 2015-11, measurement of inventory depends on the cost method used.
Inventory accounted for using the LIFO or retail methods will continue to be measured at the lower of cost or market (LCM).
Inventory accounted for using any other method (e.g., FIFO or average cost) is measured at the lower of cost or net realizable value (NRV). Moreover, only one measure of NRV should be calculated. NRV is the estimated selling price in the ordinary course of business, minus reasonably predictable costs of completion, disposal, and transportation.
The inventory measurement under ASU 2015-11 is more closely aligned with IFRS. Under IFRS, inventory also is measured at the lower of cost or net realizable value (NRV). Accordingly, U.S. GAAP and IFRS measures of inventory will not differ except when entities applying U.S. GAAP use the LIFO and retail methods. However, the difference between IFRS and U.S. GAAP in respect to reversals of inventory write-downs still exists.
ASU 2015-11 may be tested on the CPA Exam beginning in Q2 of 2016. Gleim CPA Review will update the 2016 edition of CPA FAR to explain the differences between the current and new treatments.
Professor Michael Kustanovich, M.A., CPA is a Lecturer of Accountancy at the University of Illinois at Urbana-Champaign. He is also an editor of Gleim CPA Review and Gleim CPE courses.
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