Analysis of Simplification of Accounting Initiative for Inventory and Update of Other Simplification Proposals

• DOI: http://doi.org/10.1002/jcaf.22155
• Date: 01 May 2016
• Published date: 01 May 2016

9

© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22155

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Analysis of Simplification of

Accounting Initiative for Inventory

and Update of Other Simplification

Proposals

James Penner, Jerry Kreuze, and Sheldon Langsam

LOWER OF COST

OR MARKET

SIMPLIFICATION

As part of the

accounting simplifi-

cation initiative set

forth by the Financial

Accounting Stan-

dards Board (FASB),

Accounting Stan-

dards Update (ASU)

2015-11, Simplifying

the Measurement of

Inventory, has been

issued. Under the

new U.S. generally

accepted accounting

principles (GAAP), companies

will be required to measure

inventory at the lower of cost

or net realizable value. Net

realizable value is defined as

the “estimated selling prices

in the ordinary course of

business less reasonably pre-

dictable costs of completion,

disposal and transportation.”

Both public companies and

other than public entities

will be required to adopt

the changes on a prospec-

tive basis. Public companies

will be required to adopt the

new accounting standard for

interim reporting periods

starting in fiscal years end-

ing after December 15, 2016.

Other than public

entities will be

required to adopt

the new accounting

standard starting in

fiscal years ending

after December 15,

2016, and interim

periods thereafter.

Early application

is permitted for all

entities.

The methods

(average cost; first-

in first-out [FIFO];

last-in, first-out

[LIFO]; and the

retail inventory

method) of estimating the cost

of inventory under U.S. GAAP

will not change as a result

of the accounting standards

update. Due to the anticipated

costs and possible complexi-

ties, companies using either

LIFO or the retail inventory

method are scoped out of

applying the changes in ASU

This article examines Accounting Standards

Update 2015-11, Simplifying the Measurement

of Inventory. Through the accounting simplifica-

tion initiative, the Financial Accounting Stan-

dards Board is reviewing areas of U.S. generally

accepted accounting principles (GAAP) that can

be simplified while still maintaining high-quality

accounting standards. Under this new standard,

companies will be required to value inventory

using the lower of cost or net realizable value.

Companies using the last-in, first-out (LIFO) and

retail inventory methods will be scoped out of

applying the new standard. © 2016 Wiley Periodicals, Inc.

Refereed (Double-Blind

Peer Reviewed)