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FASB Wants to Simplify U.S. GAAP

Announced on May 28th, the Financial Accounting Standards Board (“FASB”) is working on two projects planned to make U.S. GAAP less complicated. Called the “simplification initiative”, both proposals are aimed to remove the concept of “extraordinary items” from U.S. GAAP and simplify the ensuing inventory measurement.

The proposals include Subtopic 225-20, Income Statement — Extraordinary and Unusual Items, and Topic 330, Inventory. Per Subtopic 225-20, organizations are required to categorize and disclose one-time, “extraordinary” events and transactions. An event is labeled “extraordinary” if it’s unusual and infrequent. If both conditions are met, then the organization must separate the event from its income in continuous operations, as well as report its effect on earnings per share and tax. However, few companies currently list items as extraordinary, so the FASB wants to remove the concept of extraordinary from the Codification.

Also, the FASB seeks to update Topic 330, Inventory, for inventory accounting simplification purposes. Topic 330’s guidance, which hasn’t been revised in nearly 70 years, requires companies to assess inventory at the lesser of cost or a market price, and is defined as equaling the replacement cost. The market price can be more than the value a company might recognize, but not any lower than that amount. As part of its efforts, the FASB research staff recommended an amendment that mandates measuring inventory at the lower of cost or fair value.

Anticipating a July release for both proposals, the FASB will open the public comment period for three months. After the comment period ends, the FASB will seek other quick, simplification-related projects to make U.S. GAAP easier on accountants to apply.

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