FASB issues new pronouncement Simplifying the Measurement of Inventory

The FASB issued ASU No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory, in July as part of its Simplification Initiative. The amendments in the Update apply to all inventory that is not measured using LIFO or the retail inventory method; in other words, that which is measured using FIFO or average cost. LIFO and the retail method were excluded because the Board did not believe that the transition costs for inventory measured using LIFO or the retail inventory method could be justified.

Inventory within the scope of the Update should be measured at the lower of cost or net realizable value (NRV is the estimated, ordinary selling prices, less reasonably predictable costs of completion, disposal, and transportation), rather than the lower of cost or market. Prior to this Update, “market” could be one of three amounts: replacement cost; net realizable value; or net realizable value less normal profit margin. (Remember that inventory accounted for using the LIFO or retail methods will continue to be measured at the lower of cost or market.)

The amendments become testable on the CPA Exam beginning with the April 2016 test window.

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