A retailer measures one inventory pool using the FIFO cost method. At year-end, that pool's cost is $500,000 and its net realizable value (estimated selling price less reasonably predictable costs of completion and disposal) is $460,000. A separate division of the same company measures a different inventory pool using the LIFO method. Under ASC 330 as amended by ASU 2015-11, which statement is correct?
- Both inventory pools must be written down using the lower of cost or net realizable value test, because ASU 2015-11 eliminated all differences in inventory measurement between costing methods
- The FIFO pool must be written down to $460,000 under the lower of cost and net realizable value test; the LIFO pool remains subject to the older lower of cost or market test, comparing replacement cost to a ceiling of net realizable value and a floor of net realizable value less a normal profit margin
- Neither pool requires any write-down, because lower of cost or market testing was eliminated by ASU 2015-11 and inventory is now always carried at historical cost
- The FIFO pool is exempt from any write-down testing, because only LIFO and retail-method inventory are subject to impairment testing under ASC 330
Why B? And why not the others?
Correct answer: B. The FIFO pool must be written down to $460,000 under the lower of cost and net realizable value test; the LIFO pool remains subject to the older lower of cost or market test, comparing replacement cost to a ceiling of net realizable value and a floor of net realizable value less a normal profit margin
ASU 2015-11 replaced the lower of cost or market test with the lower of cost and net realizable value test, but only for inventory measured using methods other than LIFO or the retail inventory method, such as FIFO or average cost. Since the FIFO pool's net realizable value of $460,000 is below its $500,000 cost, it must be written down to $460,000. The LIFO pool was specifically carved out of this simplification and continues to apply the older lower of cost or market test, where market is replacement cost bounded by a ceiling of net realizable value and a floor of net realizable value less a normal profit margin. Option A is wrong because ASU 2015-11 did not eliminate all differences between methods; it created a bifurcated model where LIFO and retail-method inventory keep the old test. Option C is wrong because write-down testing was simplified, not eliminated. Option D reverses the rule: FIFO and average-cost pools are the ones using the newer lower-of-cost-and-net-realizable-value test, while LIFO and retail-method inventory keep the older test; neither is exempt from testing altogether.
Source: FASB ASC 330-10-35 as amended by ASU 2015-11 (Simplifying the Measurement of Inventory)