Costly. Complex and Confusing. In an effort to make financial reporting and the potentially prohibitive cost associated with compliance a little easier to digest, the Financial Accounting Standards Board (FASB) has proposed two more Accounting Standards Updates (ASU). This could result in a welcome bright spot on the privately held business horizon. (Read the other recent FASB updates in my earlier blogs posted here).
At the urging of the Private Company Council (PCC), (the FASB-based advising body for privately held business), FASB has proposed additional changes to simplify reporting for private companies (i.e. small business). One of the goals of the PCC is to reduce the cost and complexity of financial reporting for the private companies, while maintaining the integrity and usefulness of information reported to stakeholders of private companies. The proposed changes include:
- Inventory Measurement
The first new proposal addresses the measurement of inventory. Under current U.S. Generally Accepted Accounting Principles (GAAP), entities are required to measure inventory at the lower of cost or market. Under this standard, “market” could mean net realizable value, replacement cost, or net realizable value less a normal profit margin. The proposed standard would require inventory to be measured at the lower of cost or net realizable value; thereby, eliminating the need to consider replacement cost and net realizable value, less a normal profit margin. This simplification, it is hoped, would reduce the cost and complexity of inventory measurement and create a more consistent measurement of inventory.
- Measurement of Extraordinary Items
FASB has proposed an update to eliminate the concept of extraordinary items. An extraordinary item is viewed as a transaction or event that is unusual and infrequent in occurrence. This is a very loosely defined and broad term, which has caused much confusion for companies in determining when an event or transaction should be considered “unusual and infrequent”.
The intent, again, of eliminating the “extraordinary item” concept is to reduce complexity and costs for private companies and their auditors, advisors and regulators.
Keep in mind that the two proposed ASU’s are just that – proposed. The comment period for the professional community on these two proposals is through September 30, 2014. However, given the recent track record and trend of the FASB adopting changes and updates to simplify financial reporting for private companies, there is a strong likelihood that these will be implemented within the next few months.
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