The US FASB has issued an exposure draft of changes to the disclosure requirements for inventory, with comments due by March 13, 2017.
Here’s how they summarize the proposals, which would be applied prospectively:
- “The amendments in this proposed Update would modify the disclosure requirements for inventory. The following additional disclosures would be required …for all entities…:
- 1. Inventory disaggregated by component (for example, raw materials, work-in-process, finished goods, and supplies)
- 2. Inventory disaggregated by measurement basis
- 3. Changes to the inventory balance that are not specifically related to the purchase, manufacture, or sale of inventory in the ordinary course of business
- 4. A qualitative description of the types of costs capitalized into inventory
- 5. The effect of last-in, first-out (LIFO) liquidations on income
- 6. The replacement cost for LIFO inventory.
- Entities that report some or all of their inventory using the retail inventory method (RIM) also would be required to provide qualitative and quantitative information about the critical assumptions used in the calculation of inventory under the RIM.
- In addition, entities that are subject to disclosing segment information …would be required to disclose, in both annual and interim periods, inventory by reportable segment and by component for each reportable segment to the extent that information is regularly provided to the chief operating decision maker.”
It’s interesting to compare these with the current IFRS disclosure requirements set out in IAS 2. The LIFO method isn’t applied under IFRS, so we can overlook those items. As for the others:
- Inventory disaggregated by component (for example, raw materials, work-in-process, finished goods, and supplies) – IAS 2.36(b) requires disclosing the carrying amount of inventories “in classifications appropriate to the entity,” which often amounts to providing the kind of disaggregation proposed by FASB, but obviously wouldn’t always do so;
- Inventory disaggregated by measurement basis – similarly, IFRS reporters might or might not provide this, depending on their application of that same concept in 36(b)
- Changes to the inventory balance that are not specifically related to the purchase, manufacture, or sale of inventory in the ordinary course of business – IAS 2.36(e) and (f) require disclosures of write-downs and reversals, but this doesn’t necessarily capture everything that might cause material changes in the balance; for example, the FASB proposal mentions balance sheet classifications and inventory disposed of through divestitures.
- A qualitative description of the types of costs capitalized into inventory – the proposal doesn’t go into too much detail on how this might look, but observes that such disclosure “could serve as a catalyst for users to ask questions of management, particularly if the nature of capitalized costs changed over time or differed across companies in the same industry.” It again isn’t specifically required by IAS 2, but might be provided by an entity that takes an expansive view of how to disclose “the cost formula used” under IAA 2.36(a)
- Qualitative and quantitative information about the critical assumptions used in the calculation of inventory under the RIM – IFRS reporters might disclose some information in this vein to comply with the IAS 1 requirements to disclose significant judgments and estimates, or because of broader notions of fair presentation, but nothing in IAS 2 specifically requires it
- Information by segment – IFRS 8 doesn’t specifically require this, so again such disclosure under IFRS would only flow from an issuer’s broader analysis of things.
This all suggests that the FASB proposals (even if they’re not ultimately all adopted) provide a good reference point for IFRS reporters in considering the overall effectiveness of their disclosures about inventory (if not in the statements, then perhaps in the MD&A). This might also apply in some circumstances to the other items that FASB considered as part of the project, but didn’t end up proposing for the following reasons:
- Royalty or other arrangements that will obligate the entity to incur expenses upon the sale of items in inventory subject to those arrangements – among other things, some board members were concerned that such a requirement might equally pertain to other arrangements (for example, sales commission arrangements), which also obligate the entity to incur expenses on selling certain items of inventory;
- The amount of inventory on consignment and the nature of the consigned inventory – among other things, board members questioned the pervasiveness and materiality of such arrangements;
- Inventory pledged as collateral – the SEC requires disclosure of all assets subject to lien; however, GAAP only requires disclosure of certain financial assets pledged as collateral. The board decided not to add such a requirement for inventory because it wouldn’t address the lack of a broader disclosure requirement;
- Inventory measured at fair value, net realizable value, or market value – the board decided “the potential benefits to users would not justify the perceived costs—both in terms of preparation costs and potential loss of proprietary data.”
Regardless of those broad assessments, these all seem like things that might provide a material perspective in some specific circumstances. So, although none of the above is or will be a necessary input in assessing what to disclose under IFRS, it might all be good food for thought once in a while…
The opinions expressed are solely those of the author