FASB proposals on inventory, extraordinary items seek simplification

FASB published proposals Tuesday that are designed to simplify the measurement of inventory and eliminate the concept of extraordinary items.

The proposals are part of FASB’s simplification initiative, which is designed to reduce cost and complexity in financial reporting while improving or maintaining the usefulness of information to users through narrow-scope projects that could simplify GAAP in a short period.

In the proposal titled Inventory (Topic 330): Simplifying the Measurement of Inventory, FASB proposes measuring inventory at the lower of cost or net realizable value. Current GAAP requires reporting organizations to measure inventory at the lower of cost or market, where market could be net realizable value, replacement cost, or net realizable value less a normal profit margin when measuring inventory.

The proposal is designed to reduce complexity by narrowing the possibilities for measurement. The proposal would eliminate existing requirements to consider the replacement cost of inventory and the net realizable value of inventory less an approximately normal profit margin.

The other proposal, Income Statement–Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, seeks to lower cost and complexity by eliminating the concept of extraordinary items.

Under current GAAP, organizations are required to evaluate whether an event or transaction is an extraordinary item. If deemed extraordinary, the item is required to be separately presented and disclosed.

But, according to FASB, uncertainty arises in the determination of whether items are extraordinary, because it is unclear when an item should be considered both unusual and infrequent. FASB believes eliminating the concept would relieve preparers from the burden of assessing whether events or transactions are extraordinary.

In addition, FASB intends to alleviate uncertainty for preparers, auditors, and regulators because it would no longer be necessary for auditors and regulators to evaluate whether a preparer presented an unusual and/or infrequent item appropriately.

FASB expects that both proposals, if approved, would be applied prospectively in annual periods, and interim periods within those annual periods, beginning after Dec. 15, 2015. Early adoption would be permitted.

Comments on the inventory and extraordinary items proposals can be submitted through Sept. 30 at FASB’s website.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.