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Companies' Responses to SFAS 151
An overarching goal of financial accounting is to provide useful information to a company's external stakeholders, including equity investors, potential equity investors, lenders, potential lenders, and others. Inventory accounting is particularly important for manufacturing companies. Differing opinions on which type of information about inventories is most useful to stakeholders has led to variations in accounting standards across the globe. As part of an effort to improve the comparability of financial reporting worldwide, FASB and the IASB have moved to eliminate narrow differences in their standards. One consequence of this effort was Statement of Financial Accounting Standards (SFAS) 151, Inventory Costs (Accounting Standards Codification [ASC] 330-10-30, paras. 1-8), effective for fiscal years ending after June 15, 2005.
SFAS 151 changed the wording of Accounting Research Bulletin (ARB) 43 (ch. 4, para. 5)-with respect to the account- ing treatment of fixed manufacturing overhead costs when manufacturers experience abnormal unused productive capacity-in order to make it more consistent with International Accounting Standard (IAS) 2, Inventories. According to ARB 43, unused productive capacity could be "so abnormal" as to require current-period expensing of all fixed manufacturing overhead costs associated with unused capacity, rather than the partial allocation of those costs to work-in-process and finished-goods inventories (ARB 43, ch. 4). SFAS 151 amended the wording of ARB 43 to require the expensing of fixed manufacturing overhead associated with abnormal unused productive capacity. Thus, a company encountering a decline in capacity utilization would be more likely to expense the fixed manufacturing costs associated with unused capacity in the current period under SFAS 151 than under ARB 43.
The economic downturn that began in the second half of 2008 presented an opportunity to examine the impact of SFAS 151 and its application by the many companies that experienced a precipitous decline in capacity utilization. The authors' analysis observed inconsistent inventory and cost-of-goods-sold reporting by public manufacturing companies during the downturn. The following sections describe SFAS 151 and the proper accounting for inventory under SFAS 151, consider manufacturing companies' disclosures related to SFAS 151 during the economic downturn, examine the difficulty in estimating the impact of SFAS 151 when the adjustment amount is not disclosed, and offer prescriptive recommendations for improving the usefulness of reporting for inventory...