In its quest to simplify accounting standards, the Financial Accounting Standards Board has issued two new proposals -- one to make it easier to measure inventory and another to eliminate requirements around extraordinary items.

To make inventory measurement simpler, FASB proposes to eliminate some of the measurement methods that currently exists in U.S. GAAP. Currently, companies are required to measure inventory at the lower of cost or market value. Market value could be set according to the net realizable value of the inventory, the replacement cost, or the net realizable value minus a normal profit margin. FASB says the proposed guidance would require inventory to be measured at the lower of cost or net realizable value, eliminating the requirements to consider the replacement cost or the approximate normal profit margins.

FASB says the board has heard from stakeholders that existing inventory guidance is unnecessarily complicated because it leads to several different potential outcomes. The proposed change would reduce the number of variables, thereby limiting the number of potentially different answers. It also would make GAAP more consistent with International Financial Reporting Standards. “The changes would reduce the cost and complexity of the subsequent measurement of inventory and result in greater consistency in the measurement of inventory,” FASB said in a statement regarding the proposal.

As for extraordinary items, FASB proposes to do away with their separate presentation in U.S. GAAP. That would spare companies the analysis of whether an event or transaction is both “unusual” or “infrequent” as specified in GAAP, and therefore should be separately presented. It also would spare companies the audit scrutiny of those determinations. “The board believes that eliminating the concept would save time and reduce cost for preparers,” FASB said. The board's proposal says investors and other users of financial statements have said they would still be able to glean from disclosures where a company has extraordinary events or transactions, and those disclosure requirements would not change under the proposal.

The idea behind FASB's simplification initiative is to look for ways to revise accounting standards so that the cost and complexity is reduced, but the usefulness of information to investors is maintained or improved. FASB says it will continue to add narrow-scope projects to its agenda as it hears about possible improvements that the board should consider.

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