A FASB Exposure Draft released January 10th, 2017 included two different amendments that would modify disclosure requirements for LIFO inventories. The two amendments would require the following additional LIFO-related disclosures:
1) The effect of last-in, first-out (LIFO) liquidations on income
2) The replacement cost for LIFO inventory
A summary of the LIFO-related amendments to Inventory Topic 330 in the FASB Exposure Draft is provided below:
Composition of Inventory
330-10-50-8 This January 2017 draft says an entity shall disclose the major components of inventory such as raw materials, work-in-process, finished goods, and supplies for each period presented. If it is not practical to assign amounts to major components of inventory using the last-in, first-out (LIFO) cost flow assumption, the major components may be disclosed under cost flow assumptions other than LIFO with the excess of such total amount over the aggregate LIFO amount shown as a deduction to arrive at the amount of the aggregate LIFO inventory.
330-10-50-9 An entity shall disclose the measurement bases for its inventory, such as LIFO, first-in, first-out (FIFO), LIFO retail inventory method, or weighted average and the amount recorded under each basis.
Inventory Reported under the LIFO Cost Flow Assumption
330-10-50-13 An entity applying the LIFO cost flow assumption to all or a portion of its inventory shall disclose the following:
- Excess of replacement cost or current cost over the reported inventory amount
- Effect on net income of the liquidation of a portion of an entity’s LIFO inventory.
Replacement Cost for Inventories Measured Using LIFO
BC48. Decision Question L15 of the proposed Concepts Statement indicates that the Board should consider disclosure when an alternative measure or way of applying a measurement is clearly incrementally useful in assessing prospects for cash flows. This led the Board to consider a requirement to disclose the replacement cost of inventories measured at LIFO under this January 2017 draft.
BC49. Because the LIFO inventory cost reported in a company’s balance sheet often does not represent the current cost of the inventory, Regulation S-X already requires public companies to disclose the excess of replacement cost over LIFO cost. The AICPA LIFO Paper also discusses whether companies should disclose the difference (often represented by the “LIFO reserve”) between LIFO cost and cost determined by some other acceptable inventory costing method (such as first-in, first-out [FIFO] or average cost). The Board decided to require this disclosure for all entities, because many public and nonpublic companies already disclose the information and this disclosure would provide insight into an entity’s prospects for future cash flows.
BC50. While this proposed requirement in this January 2017 draft would create redundancy with SEC guidance, adding the requirement to Topic 330 would extend the requirement to all companies applying GAAP and would enhance the decision usefulness of inventory disclosures. The Board agreed with those users that noted that this disclosure would be appropriate as a required disclosure in Topic 330.
The full version of the January 2017 FASB Exposure Draft is shown below:
FASB_Exposure_Draft