Lower of cost or market
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Lower of cost or market (LCM or LOCOM) is a conservative approach to valuing and reporting inventory. Normally, ending inventory is stated at historical cost (what was paid to obtain it). However, there are times when the original cost of the ending inventory is greater than the cost of replacement, and thus the inventory has lost value. If the inventory has decreased in value below historical cost, then its carrying value is reduced and reported on the balance sheet. The criterion for reporting this is the current market value. Any loss resulting from the decline in the value of inventory is charged to "Cost of goods sold" (COGS) if non-material, or "Loss on the reduction of inventory to LCM" if material.
The term "lower of cost or market" is now obsolete and is officially replaced by "lower of cost and net realizable value." According to the FASB Accounting Standards Update, "An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation." This FASB update makes usage consistent with the IFRS wording and removes the unfortunate use of "or" in a context where "and" was always the correct one.
- FASB Accounting Standards Update, No. 2015-11, July 2015, p. 1.