The financial accounting Standards Board (FASB) has been working on a Simplification Initiative. The goal of this initiative is to identify areas of US Generally Accepted Accounting Principles (GAAP) where cost and complexity can be reduced while maintaining or improving the usefulness of information provided in the financial statements. As part of the Simplification Initiative the FASB has proposed a change to the accounting for inventory.
Lower of Cost or Market
Existing GAAP requires that inventory be measured at the lower of cost or market. The measurement of market begins with the cost to replace the inventory. However, in order to use replacement cost as the market measurement of inventory the replacement cost must be between two constraining variables. Replacement cost must not be greater than the estimated selling price in the ordinary course of business, less the reasonably predictable costs of completion, disposal and transportation, known as net realizable value (NRV). In addition, the replacement cost must not be less than NRV less a normal profit.