Standard On Inventory Costs Issued; More From IASB, EU

Before breaking for the Thanksgiving holiday last week, the Financial Accounting Standards Board issued FASB Statement No. 151, Inventory Costs, to specify that companies should report abnormal inventory amounts as charges against earnings in the current period. Abnormal inventory includes idle facility expense, freight, handling costs and wasted materials.

FASB issued the statement to make U.S. reporting consistent with international reporting, which ultimately makes it easier for investors to compare corporate reports from different nations.

FASB and the International Accounting Standards Board compared their respective standards on inventory and agreed that their intent was the same—to require that abnormal inventory amounts be expensed and not capitalized.

However, the language differed enough between the two standards to leave room for differences in interpretation, which could create inconsistent application. FASB chose to tighten its own language to make its intention more clear.

The standard takes effect for annual reports beginning after June 15, 2005. Companies may begin to apply the standard immediately, but not retroactively.

FASB, IASB Form Working Group on Performance Reporting

The Financial Accounting Standards Board and the International Accounting Standards Board have formed a new international working group to help establish standards on financial statements that will make the information more useful in assessing an organization’s performance.

FASB and IASB have conducted separate projects on financial statement presentation in the past but decided in the interest of convergence to proceed with a joint project, which they initiated in April 2004. The 24-member working group—consisting of senior professionals with extensive experience in preparing, analyzing, auditing and regulating financial statements—will be key to driving the joint project.

Member of the working group include representatives from companies like Swiss-based Novartis and Nestlé, Matsushita Electric in Japan, and others. U.S. members of the working group include General Motors Chief Accounting Officer Peter Bible, Moody’s Managing Director Gregory Jonas; McCormick & Co. VP and Controller Ken Kelly, and others.

The boards decided that the reporting needs of financial institutions should be carved out of the process and addressed separately by a specialist subgroup, which is yet to be created.

The latest update from the new international working group is available from the box above, right.

European Union Finalizes Controversial Derivatives Rule

The European Union has finalized its liberal accounting standard for valuing derivatives, bowing to influence from financial institutions and bucking international accounting standards.

The European Union adopted an amended version of International Accounting Standard 39 to allow a more liberal interpretation of the principles of fair value and hedge accounting. European banks in particular sought the more liberal approach because they believed the strict international version would lead to volatility in reported profits and balance sheet values. Advocates of the international standard say opponents are merely trying to protect a means of hiding losses.

Controversy aside, the new standard creates new uniformity among accounting standards for companies throughout Europe, which previously followed individual country standards that varied greatly.