Prior to 2015, most inventories were valued at the “lower of cost or market.” Specifically, there was a two-step process to determine whether inventory needed to be written down. First, a firm had to determine “market” (based on the ordering of replacement cost, net realizable value and net realizable value less a normal profit margin) and then the firm determined whether carrying value exceeded this determined market value. In 2015, the FASB simplified the rules (for firms other than those using LIFO or the retail inventory method) and firms compare cost directly to net realizable value.

Definition: Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

a. Do you think it is reasonable to depart from historical cost when valuing inventory? Why? (Use arguments based on the conceptual framework to support your response).

b. The justification for the update was:

The Board is issuing this Update as part of its Simplification Initiative. The objective of the Simplification Initiative is 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.

Provide an example of a simplification in inventory valuation that would REDUCE the usefulness of the information provided for users. Be specific. Describe how you would measure the value of the inventory, how it is simpler than the existing method, and why it is not useful.

c. How would you determine whether a simplified standard maintains or improves the usefulness of the information?

Answer rating: 100% (QA)

Part A Yes it is reasonable as valuing inventory in old method will mean we are departing form the t... View the full answer