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Accounting Standards Update: Simplifying the Measurement of Inventory

By Robert Bell

In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update ASU 2015-11 – Simplifying the Measurement of Inventory as part of the Board’s Simplification Initiative. Under previous guidance, an entity subsequently measures inventory at the lower of cost or market; market being defined as replacement cost. Under ASU 2015-11, inventory is measured at the lower of cost and net realizable value. Net realizable value can be defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The effective date of this transition for all entities is for annual periods beginning after December 15, 2016. Disclosure of the nature and reason for accounting change is required.