A recent standard passed by the Financial Accounting Standards Board (FASB) more closely aligns accounting standards for companies in the United States with standards observed by companies under international accounting standards. This standard goes into effect for all companies with fiscal years starting after December 15th, 2016, so the current fiscal year is affected by this standard. The standard will be applied prospectively, so no changes are needed to be made to the previous year when comparative financial statements are presented. Please note that this only applies for entities utilizing the FIFO (First-In, First-Out) method for valuing inventory. Prior to the implementation of this standard, companies measured inventory at lower of cost or market, with market falling under one of the following umbrellas:
- Replacement Cost
- Net Realizable Value
- Net Realizable Value minus a reasonable markup
The new standard eliminates options one and three and all companies will use net realizable value when determining what “market” is, and lower of cost or market model will continue to be used. Net realizable value is defined as the market value determination less costs that will occur in the ordinary course of disposing of the asset. This will include preparing the inventory for sale, transportation of the inventory, and any other expense needed to transfer over the physical custody of the asset to the buyer. When the current carrying value of the inventory (cost) is determined to be higher than the amount determined after the net realizable value calculation, inventory is written down and a loss on value of inventory is to be recognized on the income statement.
For more information regarding this new standard, please contact Tony Mueller, CPA at 314-576-1350 or firstname.lastname@example.org.