The Financial Accounting Standard Board (FASB) announced a new approach would be used to measure inventory in an effort to reduce complexity related to subsequent measurements.

The new Accounting Standards Update (ASU) 2015-11, Inventory (Topic 330),Simplifying the Measurement of Inventory, will apply to all inventory measured using first-in, first-out (FIFO) or the average cost method, not entities that measure inventory using last-in, first-out (LIFO) or the retail inventory method.

Currently GAAP requires an entity to measure inventory at the lower of cost or market. Market could be measured as replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. Under the new guidance, inventory should be measured at the lower of cost or net realizable value. FASB defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

Outlined below are effective dates and guidelines for implementing the new ASU:

  • Public entities: Fiscal years beginning after Dec. 15, 2016, including interim periods for the fiscal year.
  • Non-public entities: Fiscal years beginning after Dec. 15, 2016 and interim periods within fiscal years beginning after Dec. 15, 2017. Entities should apply the new guidance prospectively.
  • Early application is permitted as of the beginning of an interim or annual reporting period.

Have more questions regarding the recent inventory measurement updates or how to implement them? Contact Doeren Mayhew’s accounting advisors in Michigan, Houston and Ft. Lauderdale to gain further insight on how these changes will affect your accounting methods.