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For as long as we can remember, well – for most of us, generally accepted accounting principles (GAAP) requires inventory to be recorded at cost and subsequently measured at the lower of cost OR market. Sounds easy, but market could mean replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. This means that every company could be working off of a different inventory measurement.
Welcome accounting standards update 2015-11, issued in July 2015, to simplify inventory measurement. Except as noted below, inventory will now be measured at the lower of cost AND net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This change is not expected to result in a significant change in practice, but take a minute to consider how your inventory is being measured and make sure you are in-line with the new guidance.
These changes are effective for years beginning after December 15, 2016, applied prospectively, with earlier adoption permitted.
If you are currently measuring inventory using last-in, first-out (LIFO) or the retail inventory method, no changes are necessary.
Still curious to learn more? Reach out to us today to continue the discussion. Our team of professionals would love provide further insight into this topic.
Delap LLP is one of Portland's largest local tax, assurance, and consulting accounting firms, located in Lake Oswego, Oregon.