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ASC 330: Inventory Accounting Under GAAP

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ASC 330 is the FASB Accounting Standards Codification topic that governs how companies value inventory under U.S. GAAP. It sets two rules: inventory is first recorded at cost, then written down when its value falls. The write-down test depends on the costing method. Companies using FIFO or average cost apply lower of cost and net realizable value (LCNRV). Companies using LIFO or the retail inventory method apply lower of cost or market (LCM).

That split comes from ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, issued July 22, 2015. It replaced the old market test for most companies while leaving LIFO and retail method users on the prior rules. The sections below cover which costs enter inventory, how each measurement model works, and why GAAP write-downs are permanent.

What ASC 330 governs

ASC 330 covers the initial cost and subsequent measurement of inventory: raw materials, work in process, finished goods, and supplies held for sale or consumption in production. It applies to most commercial and manufacturing entities reporting under U.S. GAAP. The topic does not set which costing flow assumption a company uses; it sets the valuation floor once that method is chosen.

The primary basis of accounting for inventory is cost, defined as the price paid to acquire an item plus the expenditures to bring it to its existing condition and location. Cost holds on the balance sheet until evidence shows the inventory is worth less than that carrying amount. At that point ASC 330 requires a write-down.

Which costs go into inventory

Inventory cost under ASC 330 includes the purchase price plus the costs needed to prepare goods for sale: freight-in, handling, direct materials, direct labor, and both variable and fixed production overhead. Certain costs are expensed as incurred rather than capitalized, even when they touch production, because ASC 330-10-30 treats them as period charges.

Fixed overhead is allocated based on the normal capacity of the facility, the output expected over several periods under normal conditions, accounting for planned maintenance downtime. When production runs abnormally low or a plant sits idle, the per-unit overhead rate is not increased. The unallocated fixed overhead is recognized as an expense in the current period instead of being buried in unit cost.

Variable production overhead is allocated on the actual use of the facilities. Abnormal amounts of freight, handling, and wasted material count as current-period charges, not inventory, because they represent excess or redundant cost rather than value added to the goods. A general rise in supplier prices is not abnormal and stays in cost.

For tax purposes, the Section 263A uniform capitalization rules require some costs that GAAP expenses to be capitalized into inventory instead, so book and tax inventory figures can differ for the same company.

The two measurement models

After cost is established, ASC 330 requires a subsequent measurement test that can force a write-down. Which test applies depends entirely on the costing method. This is the core change from ASU 2015-11, and it is the most misread part of the standard.

Companies on FIFO or average cost compare carrying cost directly to NRV and use the lower figure. They no longer evaluate replacement cost or NRV less a normal margin. Companies on LIFO or the retail method still run the older three-way comparison.

Lower of cost and net realizable value (FIFO and average cost)

Under LCNRV, inventory is carried at the lower of its cost or its net realizable value. NRV is the estimated selling price in the ordinary course of business, less the reasonably predictable costs of completion, disposal, and transportation. If cost exceeds NRV, the difference is recognized as a loss in the period the decline occurs.

The calculation is direct. NRV equals expected selling price minus costs to finish and sell. A retailer holding a jacket that cost $80, expected to sell for $95, with $10 of predictable disposal and shipping cost, has an NRV of $85. Cost of $80 is lower, so no write-down. If the same jacket now sells for only $75, NRV drops to $65, and the company writes the item down from $80 to $65, a $15 loss.

ASU 2015-11 removed the older requirement that these companies also test against replacement cost and a normal-profit floor. For public business entities the change took effect for fiscal years beginning after December 15, 2016, including interim periods. Nonpublic entities applied it for annual periods beginning after December 15, 2016, and interim periods the following year.

Lower of cost or market (LIFO and retail)

Companies using LIFO or one of the other inventory costing methods that ASU 2015-11 excluded still apply the traditional lower of cost or market test. Here “market” means current replacement cost, but it is constrained by two bounds so that a distorted replacement figure cannot misstate inventory.

The designated market value is replacement cost, subject to a ceiling and a floor:

1. Ceiling: market cannot exceed net realizable value.
2. Floor: market cannot be less than NRV reduced by a normal profit margin.
3. Compare: take the constrained market figure and compare it to cost. Carry inventory at the lower of the two.

If replacement cost falls between the ceiling and floor, use replacement cost. If it sits above the ceiling, use NRV. If it drops below the floor, use the floor. This structure is why LIFO users retained a more involved test: it protects against write-downs based on a replacement cost that has moved further than the eventual selling price.

Write-downs are permanent under GAAP

Once inventory is written down under ASC 330, the reduced amount becomes its new cost basis. If the market recovers before the goods are sold, U.S. GAAP does not allow a reversal or write-up. This differs from IFRS (IAS 2), which requires reversing a prior write-down when the reasons for it no longer exist.

The write-down is recorded as a loss in earnings, often as a charge to cost of goods sold or a separate loss line if the amount is material. Substantial or unusual losses may warrant separate disclosure. Because reversals are prohibited, a large write-down in one period permanently lowers the carrying value and can inflate reported gross margin when that inventory later sells at recovered prices.

Frequent or large write-downs can also signal weak inventory management, which shows up in metrics like inventory turnover. Analysts watch write-down patterns as an indicator of obsolescence risk and demand forecasting quality.

ASC 330 quick reference

Frequently asked questions

What is the difference between NRV and market under ASC 330?
Net realizable value is estimated selling price less costs of completion, disposal, and transportation, a single figure. “Market” is a range concept used only for LIFO and retail method inventory: it starts with replacement cost, then applies a ceiling of NRV and a floor of NRV minus a normal profit margin. FIFO and average cost users test against NRV only.

Does ASU 2015-11 apply to LIFO?
No. ASU 2015-11 changed subsequent measurement to lower of cost and net realizable value only for companies using methods other than LIFO or the retail inventory method. LIFO and retail method users continue applying the older lower of cost or market test with its ceiling and floor, so their measurement did not change.

Can you reverse an inventory write-down under GAAP?
No. Under ASC 330, a write-down establishes a new cost basis, and the inventory cannot be written back up if its value recovers before sale. This is a key difference from IFRS, where IAS 2 requires reversing a prior write-down when the conditions that caused it no longer apply. The reversal can vary in size but is capped at the original write-down.

What costs are excluded from inventory under ASC 330?
Abnormal freight, handling, and spoilage, idle facility expense, unallocated fixed overhead caused by low production, selling costs, and most general and administrative expense are excluded. These are recognized as current-period charges. Fixed overhead is allocated on normal capacity, so the portion tied to unused capacity is expensed rather than capitalized into unit cost.

When was ASC 330 last changed?
The most significant recent change came from ASU 2015-11, effective for public business entities in fiscal years beginning after December 15, 2016, and for nonpublic entities in annual periods beginning after December 15, 2016. It simplified inventory measurement for FIFO, average cost, and specific identification users by moving them to lower of cost and net realizable value.

How does ASC 330 interact with the costing method a company picks?
ASC 330 does not dictate FIFO, LIFO, or average cost; a company chooses its flow assumption separately. ASC 330 then sets the valuation floor. The choice matters because it determines the write-down test: FIFO and average cost use lower of cost and NRV, while LIFO and retail use lower of cost or market, which can produce different carrying values in a declining market.

Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.

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