“Count On” Simplified Inventory Measurement with New ASU

abacus-7935_640 (320x240)A recent Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB) aims to simplify accounting for inventory. FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory as part of its Simplification Initiative, launched in 2014, which seeks to improve accounting principles generally accepted in the United States of America (U. S. GAAP) by reducing the costs and complexity of financial reporting while improving and maintaining the usefulness and value of financial statement information provided to statement users.  The level of analysis required under current standards is considered unnecessarily complex and will be significantly reduced for all entities affected by the ASU.

Under the existing standards, entities are required to measure inventory at the lower of cost or market value. Market value could be the inventory’s replacement cost, net realizable value, or net realizable value less a normal profit margin. Net realizable value is defined by FASB as the estimated selling price of the inventory less the costs of completion, disposal, and transportation. The current replacement cost is used as market value when it is less than net realizable value of inventory (the “ceiling”) but greater than the net realizable value less a normal profit margin (the “floor”).

The new ASU requires inventory measurement at the lower of cost or net realizable value. The calculation of the floor and ceiling under current standards is no longer required. In addition to simplifying financial reporting, the amendments in the ASU also more closely align inventory measurement in U. S. GAAP with inventory measurement in International Financial Reporting Standards (IFRS).

The ASU does not apply to inventory measured using the last-in, first-out (LIFO) or the retail inventory methods. Inventory measured using LIFO or retail inventory methods may continue to be measured at the lower of cost or market. The ASU applies to all other methods of inventory measurement.

The ASU is effective for public business entities for fiscal years beginning after December 15, 2016, as well as interim periods within those years. The ASU is effective for all other entities for fiscal years beginning after December 15, 2016, and for interim periods beginning after December 15, 2017. The amendments in the ASU should be applied prospectively, and early application is permitted.

If you have questions about inventory measurement or this latest guidance, contact the expert listed below at PYA (800) 270-9269.

Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

Related Posts
PYA is pleased to announce the promotions of Michael Ramey, Matt Stuart, and Jeff Pate to the level of Equity Principal. PYA has announced the promotion of Senior Manager Michael...
Read More

PYA Announces Three New Equity Principals

A Section 83(b) election could be one of the biggest tax-saving decisions for taxpayers who receive equity subject to vesting. It is common for start-up founders and key employees to...
Read More

83(b) Election for Start-Up Founders

In today’s business environment, cloud computing arrangements play a key role in the day-to-day operations of companies large and small. The Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU)...
Read More

Clearing Up Cloud Computing Accounting

An on-demand webinar, presented by Mike Shamblin, CPA, and brought to you by PYA, helps lay the foundation for the new revenue recognition standard.  The webinar guides healthcare providers of...
Read More

PYA On-Demand Webinar Outlines the New Revenue Recognition Standard in Preparation for Implementation

In the wake of this year’s devastating hurricane season, the President signed into law the “Disaster Tax Relief and Airport and Airway Extension Act of 2017” (the Act). This law...
Read More

Individual Tax Relief for Disaster Areas

Blockchain technology, one of the biggest technology developments in years, has the potential to transform the accounting and audit (A&A) industry. The potential benefits are numerous, but so are the...
Read More

Blockchain Technology—An Audit and Accounting Awakening

In one of the most unpredictable and hotly contested presidential races in United States history, Donald Trump promised, if elected, to pass, among other things, massive tax reform that would...
Read More
tax reform

Tax Reform—What Stays, What Goes, What’s Left?

As compliance regulations and laws evolve and increase in number, many organizations – hospitals, home health agencies, skilled nursing facilities, physician practices, and third-party medical billing companies, among others –...
Read More
compliance risk assessments

Compliance Risk Assessments: The Foundation of Effective Compliance Programs

Guidance on accounting for share-based payment awards is clear...unless it isn't. The Financial Accounting Standards Board (FASB) offered advisement on this very topic in its Accounting Standards Codification (ASC), Compensation—Stock...
Read More

Share-Based Payment Awards: An Update on Modification Accounting

Share This Insight

If you received value from this article, please share it with your network (e.g., Facebook, Twitter, LinkedIn). Icons below for your convenience.

Stay Current

* indicates required
Monthly eNewsletters
See more newsletter and alert options.

PYA Population Health Ascend

PYA Healthcare Blog

PYA Thought Leadership Services

The Healthcare Loop