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Journal entry — FASB proposes guidance under simplification initiative

Published on: Jul 22, 2014

Last week, the FASB issued two proposed Accounting Standards Updates (ASUs) as part of its simplification initiative:

The proposed ASUs are the first to be issued under the initiative, which began this year and consists of limited-scope projects to simplify GAAP in the near term. Developed in response to stakeholder feedback regarding guidance that could be improved, the proposals are intended to increase the usefulness of financial information for investors as well as reduce the costs and complexity of financial statement preparation.

Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items

The FASB proposes to eliminate the concept of extraordinary items1 from existing GAAP and therefore eliminate the requirement for entities to separately present such items on the income statement and disclose them in the footnotes. Currently, extraordinary items (1) are unusual in nature and (2) occur infrequently. The proposed ASU retains the reporting and disclosure requirements for an event that demonstrates one of those characteristics but not both. Accordingly, users of financial statements would continue to be informed about unusual or infrequent events after the concept of extraordinary items is eliminated. The FASB also believes that eliminating the concept would improve the efficiency of the financial reporting process since it would relieve entities from having to identify extraordinary items and comply with associated presentation and disclosure requirements.

If finalized, the standard would apply prospectively in annual periods beginning after December 15, 2015, and interim periods therein, with early adoption permitted. Comments on the proposal are due by September 30, 2014.

Simplifying the Measurement of Inventory

Under the FASB’s proposal, inventory would “be measured at the lower of cost and net realizable value,” which would eliminate the other two options that currently exist for “market”: (1) replacement cost and (2) net realizable value less an approximately normal profit margin. The proposal defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes would be made to the current guidance on inventory measurement.

Editor’s Note: In addition to reducing complexity, the proposal would make U.S. GAAP more comparable to IFRSs,2 under which inventory is required to be measured at the lower of cost and net realizable value.

If finalized, the proposal would apply prospectively in annual periods beginning after December 15, 2015, and interim periods therein, with early adoption permitted. Comments on the proposal are due by September 30, 2014.

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1 The FASB Accounting Standards Codification Master Glossary defines extraordinary items as follows:

[E]vents and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Thus, both of the following criteria should be met to classify an event or transaction as an extraordinary item:

a. Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity
operates. . . .

 b. Infrequency of occurrence. The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates.

2 IAS 2, Inventories.

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