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As discussed in ASC 330-10-30-1 and ASC 330-10-35-1B, the primary basis of accounting for inventories is cost, provided cost is not higher than the net amount realizable from the subsequent sale of the inventories. ASC 330-10-50-1 and S-X 5-02(6)(b) require reporting entities to disclose the basis of accounting for inventories (e.g., lower of cost or net realizable value).

S-X 5-02(6)(b)

The basis of determining the amounts shall be stated.
If “cost” is used to determine any portion of the inventory amounts, the description of this method shall include the nature of the cost elements included in inventory. Elements of “cost” include, among other items, retained costs representing the excess of manufacturing or production costs over the amounts charged to cost of sales or delivered or in-process units, initial tooling or other deferred startup costs, or general and administrative costs.
The method by which amounts are removed from inventory (e.g., “average cost,” “first-in, first-out,” “last-in, first-out,” “estimated average cost per unit”) shall be described. If the estimated average cost per unit is used as a basis to determine amounts removed from inventory under a total program or similar basis of accounting, the principal assumptions (including, where meaningful, the aggregate number of units expected to be delivered under the program, the number of units delivered to date and the number of units on order) shall be disclosed.
If any general and administrative costs are charged to inventory, state in a note to the financial statements the aggregate amount of the general and administrative costs incurred in each period and the actual or estimated amount remaining in inventory at the date of each balance sheet.

When a significant change in basis occurs, ASC 330-10-50-1 requires disclosures regarding the nature of the change and its effect on income. ASC 330-10-50-1 also requires disclosure of the measurement basis and the nature of any change therein as well as, if material, the effect on income. In the rare instances that inventory is stated above cost or at sales price, this fact should be disclosed. If inventory is presented at standard cost, it should be titled appropriately, as required by ASC 330-10-30-12.

ASC 330-10-30-12

Standard costs are acceptable if adjusted at reasonable intervals to reflect current conditions so that at the balance-sheet date standard costs reasonably approximate costs computed under one of the recognized bases. In such cases descriptive language shall be used which will express this relationship, as, for instance, “approximate costs determined on the first-in first-out basis,” or, if it is desired to mention standard costs, “at standard costs, approximating average costs.”

ASC 330-10-50-1 also requires disclosure of the method by which costs are removed from inventory (e.g., average cost, first-in, first-out (FIFO), last-in, first-out (LIFO), estimated average cost per unit). If LIFO or estimated average cost per unit is used, additional disclosures are required, as discussed in S-X 5-02(6)(b)-(c). LIFO disclosures are detailed in FSP 8.4.3. If the estimated cost per unit method is used, reporting entities should disclose the principal assumptions, including, where meaningful, the aggregate number of units expected to be delivered under the program, the number of units delivered to date, and the number of units on order.
As discussed in S-X 4-08(b), for any inventory mortgaged, pledged, or otherwise subject to lien, the approximate amounts thereof and the related obligations collateralized by those assets should be disclosed. Substantial and unusual losses that result from the subsequent measurement of inventory should be disclosed in the financial statements as discussed in ASC 330-10-50-2.
Some reporting entities maintain a stock of spare parts that is used in connection with maintenance agreements with customers for customer-owned equipment. Often, when the reporting entities replace a particular part, the removed part is repaired and maintained for future use. The refurbished parts should be classified as inventories. To the extent the refurbished parts are no longer used, the loss in utility of such parts should be recorded in the period in which it occurs in accordance with ASC 330-10-35-2.
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