Proposed changes to inventory disclosure rules slated for fall publication

Businesses will have to provide more details in their footnotes about their stockpiles of finished goods and raw materials under a proposal the FASB plans to release in the coming months.

A majority of the board on September 19, 2016, agreed to release the proposal for public comment, saying the package of proposed disclosures would give analysts, investors, and lenders more insight into the value of businesses’ inventories.

This information is especially helpful to analysts who follow retail businesses. They want to know about turnover and trends in inventory, whereas lenders want to know about the value of inventory as potential collateral, a FASB staff accountant said.

The proposal will have a comment period of 60 or 45 days, depending on whether a comment letter writer wants to participate in a public roundtable on disclosure issues the FASB plans to hold in mid-December or early in January. To participate in the roundtable, the comment letter writer must respond to the proposal within 45 days, the board agreed.

While most FASB members agreed that the proposed package of new information would provide these details, FASB Chairman Russell Golden and FASB member Harold Schroeder dissented. Both expressed skepticism that the information would be enough, particularly for investors analyzing the financial statements of retailers.

“I don’t think what we are doing... at this point is going to give additional disclosures to some companies that are important to their investors and give sufficient flexibility to others,” Golden said.

Schroeder, a former analyst, expressed similar views. He was in favor of the FASB requiring retailers to disclose the rollforwards of their inventory balances from period to period, but the board could not agree on a way to carve out such a requirement for one type of industry.

“There’s no question that there’s incremental benefit here,” Schroeder said of the overall package. “The disappointment here is that we cannot distinguish between those who really need the additional information versus the broad, sweeping approach that we’ve taken here.”

Topic 330, Inventory, currently has scant requirements for businesses to disclose information about their inventory. The FASB said its proposed package of disclosures would focus on conveying how different types of inventory affects a business’s prospects for future cash flows, how it affects inventory balances, and how the existence of underlying rights and contractual obligations would affect prospects for future cash flows.

The proposal would require businesses to provide a detailed breakdown, or disaggregation, of their inventory. Businesses would have to disclose inventory by segment and then break that down further by component, if the business’s decision makers use that information to determine how the business operates.

Private companies would only be required to disclose inventory by component in total. They also would have to disclose their inventory based on how they measure it.

The inventory disclosure examination effort is part of the FASB’s broader project to improve financial statement footnotes. The board has been examining disclosure requirements in three other areas — Topic 740, Income Taxes, Topic 715, Defined Benefit Plans, and Topic 820, Fair Value Measurement.

The board has released proposals on all three topics and is currently weighing feedback.

The FASB in January released Proposed Accounting Standards Update (ASU) No. 2016-210, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans.

In December, the FASB released Proposed Accounting Standards Update (ASU) No. 2015-350, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.

On July 26, the FASB released Proposed Accounting Standards Update, (ASU) No. 2016-270, Income Taxes (Topic 740): Disclosure Framework — Changes to the Disclosure Requirements for Income Taxes.

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