Ref #2015-42
Statutory Accounting Principles (E) Working Group
Maintenance Agenda Submission Form
Form A
Issue: ASU 2015-11: Inventory (Topic 330)—Simplifying the Measurement of Inventory
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
ASU 2015-11: Inventory (Topic 330)—Simplifying the Measurement of Inventory was issued as part of
FASB’s Simplification Initiative. It was noted that the guidance on the subsequent measurement of inventory
is unnecessarily complex with several potential outcomes. Topic 330, Inventory, currently requires an entity
to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or
net realizable value less an approximately normal profit margin.
The main provisions in the ASU indicate that an entity should measure inventory within the scope of ASU
2015-11 at the lower of cost and net realizable value, where net realizable value is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail
inventory method. The amendments do apply to all other inventory, including inventory measured using firstin, first-out (FIFO) or average cost.
Some of the other guidance in Topic 330 has been amended to more clearly articulate the requirements for the
measurement and disclosure of inventory. The FASB Board does not intend for those clarifications to result in
any changes in practice. For public business entities, the amendments are effective for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within
fiscal years beginning after December 15, 2017. The amendments should be applied prospectively with earlier
application permitted as of the beginning of an interim or annual reporting period.
A brief example of the FASB amendments follows.
Inventory—Overall
Subsequent Measurement
> Adjustments to Lower of Cost or Market
330-10-35-1 Paragraph superseded by Accounting Standards Update 2015-11. A departure from the
cost basis of pricing the inventory is required when the utility of the goods is no longer as great as
their cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of
business, will be less than cost, whether due to physical deterioration, obsolescence, changes in
price levels, or other causes, the difference shall be recognized as a loss of the current period. This is
generally accomplished by stating such goods at a lower level commonly designated as market.
[Content amended and moved to paragraph 330-10-35-1C]
330-10-35-1A The subsequent measurement of inventory depends on the cost method and is
different for the following:
a. Inventory measured using any method other than last-in, first-out (LIFO) or the retail
inventory method (see paragraph 330-10-35-1B)
b. Inventory measured using LIFO or the retail inventory method (see paragraphs 330-10-351C through 35-7).
Paragraphs 330-10-35-7A through 35-11 apply to all inventory.
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> Inventory Measured Using Any Method Other Than LIFO or the Retail Inventory Method
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.
> Inventory Measured Using LIFO or the Retail Inventory Method
330-10-35-1C A departure from the cost basis of pricing the {remove glossary
link}inventory{remove glossary link} measured using LIFO or the retail inventory method is
required when the utility of the goods is no longer as great as their cost. Where there is evidence that
the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether
due to damage, physical deterioration, obsolescence, changes in price levels, or other causes, the
difference shall be recognized as a loss of the current period. This is generally accomplished by
stating such goods at a lower level commonly designated as market. [Content amended as shown
and moved from paragraph 330-10-35-1]
Existing Authoritative Literature:
Statutory accounting has previously rejected GAAP pronouncements related to inventory in Issue Paper No.
99—Nonapplicable GAAP Pronouncements (listing now located in Appendix D).
 FAS 151: Inventory Costs—An Amendment of ARB No. 43, Chapter 4
 FIN 01: Accounting Changes Related to the Cost of Inventory
 ARB No. 43: Restatement and Revision of Accounting Research Bulletins, Chapter 4
 EITF 86-13: Recognition of Inventory Market Declines at Interim Reporting Dates
 EITF 86-46: Uniform Capitalization Rules for Inventory under the Tax Reform Act of 1986
 EITF 96-9: Classification of Inventory Markdowns and Other Costs Associated with a Restructuring
 EITF 04-13: Accounting for Purchases and Sales of Inventory with the Same Counterparty
Limited statutory guidance for EDP equipment, software and health care delivery assets is included in SSAP
No. 16R and SSAP No. 73. SSAP No. 16R—Electronic Data Processing Equipment and Software - adopts
GAAP guidance in ASC 985-20, Software - Costs of Software to be Sold, Leased or Marketed and rejects
FASB Codification 985-330, Software - Inventory. This guidance is not impacted by ASU 2015-11.
From SSAP No. 16R—Electronic Data Processing Equipment and Software:
Accounting for the Costs of Computer Software to be Sold
8.
This Statement adopts with modification FASB Codification 985-20, Software - Costs of
Software to be Sold, Leased or Marketed (ASC 985-20) to preclude the capitalization of software
development costs and to reject guidance regarding the treatment of capitalized costs. Additionally,
this Statement rejects FASB Codification 985-330, Software - Inventory (ASC 985-330). Statutory
modifications to ASC 985-20 and rejection of ASC 985-330 precludes capitalization of costs, and
requires such costs to be expensed, for:
a.
Costs of producing product masters incurred subsequent to establishing
technological feasibility. Those costs include coding and testing performed
subsequent to establishing technological feasibility.
b.
Software production costs for computer software that is to be used as an integral part
of a product or process.
c.
All indirect costs, including overhead related to programmers and the facilities they
occupy.
d.
Costs incurred for duplicating computer software, documentation and training
materials from product masters and for physically packaging the product for
distribution.
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From SSAP No. 73—Health Care Delivery Assets:
4.
Supplies, pharmaceuticals and surgical supplies, durable medical equipment, furniture,
medical equipment and fixtures, and leasehold improvements in health care facilities owned or
operated by the reporting entity meet the definition of assets established in SSAP No. 4—Assets and
Nonadmitted Assets (SSAP No. 4). Pharmaceuticals and surgical supplies, and durable medical
equipment held by reporting entities and used for the direct delivery of health care services are assets
which are used to fulfill policyholder obligations within the meaning of SSAP No. 4 and are admitted
assets to the extent that they conform to the requirements of this statement. Furniture, medical
equipment and fixtures, and leasehold improvements held by health reporting entities and used for
the direct delivery of health care services are admitted assets to the extent that they conform to the
requirements of this statement. Furniture, fixtures and equipment, and leasehold improvements which
are not used in the direct delivery of health care (e.g., for administrative activities including claims
processing, billing, and maintenance of medical records) are nonadmitted assets and are addressed
in SSAP No. 19—Furniture, Fixtures, Equipment and Leasehold Improvements (SSAP No. 19).
5.
The reporting entity shall maintain a control system that provides for identification of
quantities on hand and appropriate valuation (lower of cost or fair value) of supplies, pharmaceuticals
and surgical supplies, and durable medical equipment.
6.
Supplies except for pharmaceuticals and surgical supplies discussed in paragraph 7 (e.g.,
linens, uniforms and garments, food and other commodities, and housekeeping, maintenance, and
office supplies) shall be nonadmitted assets.
7.
Pharmaceutical and surgical supplies (e.g. drugs, surgical items (such as implants), and
medical dressings) used directly in the treatment of medical conditions shall be admitted assets.
8.
Durable medical equipment includes consumable or salable equipment such as wheelchairs,
crutches, braces, that is generally classified as inventory, and is of a nature that it may be reused.
Subscribers, members or policyholders may utilize durable medical equipment on a temporary basis
and later return the equipment to the provider. The provider shall recognize the diminution in value, if
any, as a result of use of such equipment.
9.
Furniture, medical equipment and fixtures, and leasehold improvements shall be depreciated
over their estimated useful lives but for a period not to exceed three years, except for a leasehold
improvement which shall be amortized against net income over the shorter of its estimated useful life
or the remaining life of the original lease excluding renewal or option periods, using methods detailed
in SSAP No. 19.
10.
In accordance with the reporting entity's written capitalization policy, amounts less than a
predefined threshold of medical supplies, pharmaceuticals and surgical supplies, durable medical
equipment, furniture, medical equipment and fixtures, and leasehold improvements shall be expensed
when purchased. The reporting entity shall maintain a capitalization policy containing the predefined
thresholds for each asset class to be made available for the department(s) of insurance.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:
None
Convergence with International Financial Reporting Standards (IFRS):
The amendments in ASU 2015-11 more closely align the measurement of inventory in GAAP with the
measurement of inventory in International Financial Reporting Standards (IFRS).
Staff Recommendation:
SSAP No. 16R and SSAP No. 73 already include guidance related to the most common items of inventory for
insurance entities and other GAAP pronouncements related to inventory have been rejected. As such, staff
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recommends that the Working Group move this item to the nonsubstantive active listing and expose
nonsubstantive revisions to Appendix D—Nonapplicable GAAP Pronouncements for Statutory
Accounting to reject ASU 2015-11 as not applicable for statutory accounting.
Staff Review Completed by:
Linda Hunsucker – August 27, 2015
NAIC staff
Status:
On November 19, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed this agenda item noting the intent to reject ASU 2015-11 in
Appendix D as not applicable to statutory accounting.
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