The Financial Accounting Standards Board (FASB) is considering whether to require businesses to provide more details in their financial statement footnotes about their inventories. Investors want more information about changes in inventory, as well as breakdowns of inventory by such factors as component, age, and geographic location. Such changes are expected to have a significant effect on most retailers, manufacturers, wholesalers and construction contractors.
Considering new disclosures
Accounting Standards Codification Topic 330, Inventory, requires limited information about inventory. But that may soon change. On July 27, the FASB began brainstorming ways businesses could provide in their footnotes more clarity about their stockpiles of raw materials, work-in-progress and finished goods.
What prompted these discussions? Securities analysts, investors, and lenders have been clamoring for more details about inventory. For example, people who follow retailers want to know about changes in inventory and breakdowns of inventory by such factors as component, age, and geographic location. Analysts in other industries want details about inventory when there’s a problem, and lenders are interested in the value of a company’s inventory.
Businesses, on the other hand, are leery of the cost of adding disclosure rules for information that they believe isn’t significant to people outside the company.
Looking beyond breakdowns
Other disclosure requirements up for discussion include whether to add narratives about the costs capitalized into inventory and changes to the inventory balance that aren’t specifically related to the purchase, manufacture or sale of inventory. The FASB also may consider requiring companies to carry over the inventory balance from the beginning to the end of a reporting period.
In addition, the board considered adding disclosures for companies that use the last-in, first-out (LIFO) method of inventory accounting and liquidate the older inventory. Other disclosures that may be added relate to consigned inventory, royalty, and other arrangements, as well as the replacement cost for LIFO inventory.
The FASB’s July discussion was considered preliminary, and the board made no decisions. The board wants to talk with more businesses and analysts. It’s also seeking feedback from its main advisory panel on private company issues, the Private Company Council.
About the author
Brandi DiGiorgio, as the leader of the manufacturing and distribution niche team, specializes in providing assurance and business consulting services to companies in those industries.