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, have told the FASB’s research staff that they don’t often field questions from investors about inventory. They’re also leery of the cost of adding disclosure rules for information that they believe isn’t significant to people outside the company.
Breaking down inventory
When discussing how companies should break down inventory, FASB members generally agree that breakdowns should vary, depending on how management views inventory — and how relevant inventory is to the company’s industry. “What I’m struggling with is, there are a couple of industries where it really matters — retail, wholesale, maybe construction,” said FASB member Harold Schroeder. “But for most of the industries, it’s a pretty small percentage, less than 10% of total assets.”
The FASB has discussed several alternatives for breaking down inventory into more digestible pieces. One approach would be to require more detailed breakdowns about inventory by segment, component, age and geographic location. Another approach would have businesses break down inventory by reportable segment and break it down further by component. A third option would require disaggregated inventory by age and geographic location.
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.
Sidebar: Should the SEC require sustainability disclosures?
The Securities and Exchange Commission (SEC) is currently considering whether public companies should have to provide sustainability information to shareholders. But the strong differences in the views expressed by investors and companies may complicate its decision.
Investors vs. businesses
Many investor groups say information about environmental, social and governance (ESG) issues is important to their investment decisions. They’re urging the SEC to address the issues in its disclosure rules.
Most businesses and business advocacy groups say that ESG matters are irrelevant to a company’s financial performance. They generally oppose plans to require additional disclosures about these issues. In their view, sustainability data is specialized information that isn’t generally relevant to a “reasonable” investor.
AICPA offers a compromise
These diverging views were expressed in comment letters responding to SEC Release No. 33-10064, Business and Financial Disclosure Required by Regulation S-K. The SEC released the preliminary rulemaking document in April 2016 to seek comments about Regulation S-K, the set of rules that cover information outside the financial statements that companies must provide in their annual and quarterly reports and offering documents for securities sales. Comments were due July 21.
The AICPA struck something of a compromise in its comment letter. It said sustainability information is important to informed voting and investing decisions. The letter cites a 2015 CFA Institute survey that found that 73% of 1,325 portfolio managers take ESG issues into account in their analysis.
However, AICPA President and CEO Barry Melancon cautioned against line-item disclosures of specific sustainability or public policy issues, because the information varies by industry and individual company. He advocates a principles-based framework that allows a company to identify and report on its own specific material issues. He believes that such an approach would likely elicit the most meaningful disclosures and avoid the disclosure of immaterial matters.
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