Accounting for the recognition of lack of recoverability of inventories can be a complex area that often requires the exercise of judgment. Although, US GAAP provides guidance under ASC 330, Inventory, it is the obligation of each entity to establish procedures to comply with the guidance. In this post, we’ll take a deeper dive into accounting for recognition of lack of recoverability of inventories.
ASC 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.
Although cost is the primary basis for inventory pricing, a departure from cost is required when the loss of usefulness of an item or other factors indicate that cost will not be recovered when the item is sold. Accordingly, in general, inventories measured using any method other than LIFO or the retail inventory method (i.e. FIFO, weighted average, etc.) should be valued at the lower of cost or net realizable value (NRV).
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