A majority of entities will soon measure inventory at the lower of cost and net realizable value. The change, part of the Financial Accounting Standards Board (FASB)'s Simplification Initiative, affects all entities that measure inventory, except those that follow last-in, first-out (LIFO) or the retail inventory method. The FASB released Accounting Standards Update (ASU) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory to address concerns that the accounting practices for inventory are needlessly complex. Entities currently record inventory at the lower of cost or market. Market is determined by using three different measurements of inventory: replacement cost, net realizable value and net realizable value minus a normal profit margin.

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the inventory. When measuring inventory that is work
in process (WIP), the expected cost to complete the
inventory is also used in determining net realizable
value.
During the comment period on the exposure draft of
Inventory (Topic 330): Simplifying the Measurement
of Inventory, FASB stakeholders said that measuring
inventory under the LIFO and retail inventory method
would result in significant transition costs and would
not improve the usefulness of the financial statements.
The FASB agreed in a May 13, 2015, meeting that it
would scope out the LIFO and retail inventory method
from the update in order to address these concerns.
Entities that use the LIFO or retail inventory method
will continue to follow current practice.
All entities will continue to adjust inventory to net
realizable value or market as applicable, when a
product loses value due to a price level change or
for other reasons such as damage, deterioration, or
obsolescence.
Changes to Topic 330 also include some rewording
of the guidance for inventory measurement and
disclosures, but the changes are not expected to
affect entities’ current practices. When adopting the
standard, entities are required to disclose information
about the nature and reason for the change in
accounting principle but are not required to provide
quantitative information about the change.
A majority of entities will soon measure inventory at
the lower of cost and net realizable value. The change,
part of the Financial Accounting Standards Board
(FASB)’s Simplification Initiative, affects all entities
that measure inventory, except those that follow last-
in, first-out (LIFO) or the retail inventory method.
The FASB released accounting Standards Update
(ASU) 2015-11, Inventory (Topic 330): Simplifying the
Measurement of Inventory to address concerns that
the accounting practices for inventory are needlessly
complex. Entities currently record inventory at the
lower of cost or market. Market is determined by
using three different measurements of inventory:
replacement cost, net realizable value and net
realizable value minus a normal profit margin.
Stakeholders that use the first-in, first out (FIFO)
and average cost methods for measuring inventory
told the FASB having three different outcomes for
market led to unnecessary complexity and reduced
the comparability of financial statements. For those
entities, the accounting standards update limits the
choice to the lower of cost or net realizable value.
The definition of net realizable value is the estimated
selling price in the ordinary course of business, minus
the predicted cost of transportation and disposal of
July 2015
Modifications Coming to Inventory Measurement

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Effective Date
The accounting standards update takes effect for
public business entities in fiscal years and interim
periods beginning after December 15, 2016. All other
entities will implement the change for fiscal years
beginning after December 15, 2016, and interim
periods beginning after December 15, 2017. Early
adoption is permitted starting at the beginning of an
interim or annual period. No matter when entities
adopt the change, the accounting update will take
place on a prospective basis.
For More Information
If you have specific comments, questions or concerns
about how the changes to inventory accounting will
affect your operations, please share them with Mark
Winiarski of the MHM Professional Standards Group.
Mark can be reached at mwiniarski@cbiz.com or
816.945.5614.

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.