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The FASB issued Accounting Standards Update (ASU) 2015-11, Inventory (Topic 330) – Simplifying the Measurement of Inventory, which requires that inventories, other than those accounted for under LIFO, will be reported at the lower of cost or net realizable value.

This Update is part of the Board’s Simplification Initiative, in order to, “…identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements.”

With the intention of simplifying the accounting for inventory without diminishing the value of financial reporting, the FASB is eliminating the floor and ceiling approach to measuring market value for lower of cost or market evaluations.   Instead of defining market as replacement cost subject to the floor and ceiling limitations, market will be defined as the net realizable value, the previous ceiling.

This requirement is effective for periods beginning after December 15, 2016 with early adoption permitted.

  • Public business entities – Effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
  • All other entities – Effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.

What does the ASU 2015-11 mean for the CPA Exam?

This proposed change in GAAP for inventory valuation should make the CPA Exam a little easier. The elimination of the complicated floor/ceiling approach, and the straightforward valuation at the lower of either cost or NRV, will bring GAAP into alignment with the IFRS approach to valuing inventory that you already know for the exam. Previously you had to study both methods; now, you only need to know one!

Based on the AICPA’s policy for incorporating changes on the exam, this change will likely start showing up on the exam in Q2 2016.

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