Question

Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Determine the specific citation for each of the following items:

1. Measurement of ending inventory using the lower of cost or net realizable value (LCNRV) rule.
2. Measurement of ending inventory using the lower of cost or market (LCM) rule.
3. The level of aggregation that should be used in applying the LCNRV or LCM rule.

Requirement	Topic	Subtopic	Section	Paragraph
1	330	10	35	8
2	330	10	35
3

Answer 1

Requirement	Topic	Subtopic	Paragraph	Citation
1	330	10	8	Depending on the character and composition of the inventory, the guidance in paragraphs 330-10-35-1A through 35-7 that is applicable to the inventory being measured may properly be applied either directly to each item or to the total of the inventory (or, in some cases, to the total of the components of each major category). The method shall be that which most clearly reflects periodic income.
2	330	10	9	The purpose of reducing the carrying amount of inventory is to reflect fairly the income of the period. The most common practice is to apply the applicable subsequent measurement guidance separately to each item of the inventory. However, if there is only one end-product category, the application of the applicable subsequent measurement guidance to inventory in its entirety may have the greatest significance for accounting purposes. Accordingly, the remeasurement of individual items may not always lead to the most useful result if the market value (for inventory measured using LIFO or the retail inventory method) or net realizable value (for all other inventory) of the total inventory to the business is not below its cost. This might be the case, for example, if selling prices are not affected by temporary or small fluctuations in current costs of purchase or manufacture.
3			10 & 11	330-10-35-10 Similarly, where more than one major product or operational category exists, the application of the applicable subsequent measurement guidance to the total of the items included in such major categories may result in the most useful determination of income. When no loss of income is expected to take place as a result of a reduction of cost prices of certain goods because others forming components of the same general categories of finished products have a market value (for inventory measured using LIFO or the retail inventory method) or net realizable value (for all other inventory) equally in excess of cost, such components need not be adjusted to the extent that they are in balanced quantities. Thus, in such cases, the guidance on subsequent measurement rule of lower of cost or market, may be applied directly to the totals of the entire inventory, rather than to the individual inventory items, if they enter into the same category of finished product and if they are in balanced quantities, provided the procedure is applied consistently from year to year. 330-10-35-11 To the extent, however, that the stocks of particular materials or components are excessive in relation to others, the more widely recognized procedure of applying the guidance on subsequent measurement to the individual items constituting the excess shall be followed. This would also apply in cases in which the items enter into the production of unrelated products or products having a material variation in the rate of turnover. Unless an effective method of classifying categories is practicable, the rule shall be applied to each item in the inventory.

Reference

330-10-35-1A The subsequent measurement of inventory depends on the cost method and is different for the following: a. Inventory measured using any method other than last-in, first-out (LIFO) or the retail inventory method (see paragraph 330-10-35-1B) b. Inventory measured using LIFO or the retail inventory method (see paragraphs 330-10-35-1C through 35-7). Paragraphs 330-10-35-7A through 35-11 apply to all inventory. > Inventory Measured Using Any Method Other Than LIFO or the Retail Inventory

Method 330-10-35-1B Inventory measured using any method other than LIFO or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) shall be measured at the lower of cost and net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. That loss may be required, for example, due to damage, physical deterioration, obsolescence, changes in price levels, or other causes. > Inventory Measured Using LIFO or the Retail

Inventory Method 330-10-35-1C A departure from the cost basis of pricing the {remove glossary link}inventory{remove glossary link} measured using LIFO or the retail inventory method is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to damage, physical deterioration, obsolescence, changes in price levels, or other causes, the 5 difference shall be recognized as a loss of the current period. This is generally accomplished by stating such goods at a lower level commonly designated as market. [Content amended as shown and moved from paragraph 330-10-35- 1]

330-10-35-2 The cost basis of recording inventory ordinarily achieves the objective of a proper matching of costs and revenues. However, under certain circumstances cost may not be the amount properly chargeable against the revenues of future periods. A departure from cost is required in these circumstances because cost is satisfactory only if the utility of the goods has not diminished since their acquisition; a loss of utility shall be reflected as a charge against the revenues of the period in which it occurs. Thus, in accounting for inventories, a loss shall be recognized whenever the utility of goods is impaired by damage, deterioration, obsolescence, changes in price levels, or other causes. The measurement of such losses for inventory measured using LIFO or the retail inventory method shall be accomplished by applying the rule of pricing inventories at the lower of cost or market. This provides a practical means of measuring utility and thereby determining the amount of the loss to be recognized and accounted for in the current period.

330-10-35-3 The rule of lower of cost or market is intended to provide a means of measuring the residual usefulness of an inventory expenditure. The term market is therefore to be interpreted as indicating utility on the inventory date and may be thought of in terms of the equivalent expenditure which would have to be made in the ordinary course at that date to procure corresponding utility.

330-10-35-4 As a general guide, utility is indicated primarily by the current cost of replacement of the goods as they would be obtained by purchase or reproduction. In applying the rule, however, judgment must always be exercised and no loss shall be recognized unless the evidence indicates clearly that a loss has been sustained. There are therefore exceptions to such a standard. Replacement or reproduction prices would not be appropriate as a measure of utility when the estimated sales value, reduced by the costs of completion and disposal, is lower, in which case the realizable value so determined more appropriately measures utility.

330-10-35-5 Furthermore, when the evidence indicates that cost will be recovered with an approximately normal profit upon sale in the ordinary course of business, no loss shall be recognized even though replacement or reproduction costs are lower. This might be true, for example, in the case of production under firm sales contracts at fixed prices, or when a reasonable volume of future orders is assured at stable selling prices.

330-10-35-7 Because of the many variations of circumstances encountered in inventory pricing, the definition of market is intended as a guide rather than a literal rule. It shall be applied realistically in light of the objectives expressed in this Subtopic and with due regard to the form, content, and composition of the inventory. For example, the retail inventory method, if adequate markdowns are currently taken, accomplishes the objectives described herein. It is also recognized that, if a business is expected to lose money for a sustained period, the inventory shall not be written down to offset a loss inherent in the subsequent operations.

330-10-35-7A If inventory has been the hedged item in a fair value hedge, the inventory’s cost basis for purposes of subsequent measurement accounting shall reflect the effect of the adjustments of its carrying amount made pursuant to paragraph 815-25-35-1(b).