Summary of Statement No. 151

Inventory Costs—an amendment of ARB No. 43, Chapter 4 (Issued 11/04)


This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . ." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities.

Reasons for Issuing This Statement

This Statement is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board (IASB) toward development of a single set of high-quality accounting standards. As part of that effort, the FASB and the IASB identified opportunities to improve financial reporting by eliminating certain narrow differences between their existing accounting standards. The accounting for inventory costs, in particular, abnormal amounts of idle facility expense, freight, handling costs, and spoilage, is one such narrow difference that the FASB decided to address by issuing this Statement. As currently worded in ARB 43, Chapter 4, the term so abnormal was not defined and its application could lead to unnecessary noncomparability of financial reporting. This Statement eliminates that term.

How the Changes in This Statement Improve Financial Reporting

ARB 43, Chapter 4, and IAS 2, Inventories, are based on the principle that the primary basis of accounting for inventory is cost. Both those accounting standards also require that abnormal amounts of idle freight, handling costs, and spoilage be recognized as current-period charges; however, differences in the wording of the two standards could lead to inconsistent application of those requirements. This Statement improves financial reporting by amending ARB 43, Chapter 4, to clarify that abnormal amounts of costs should be recognized as period costs. The amending language is similar to that in IAS 2, in order to promote consistent application of those standards.