Is the median rule for stock valn the right US GAAP provn ?

k.sankar.ra
Good Student
Posts: 14
Joined: Sat Mar 26, 2016 4:33 am

Is the median rule for stock valn the right US GAAP provn ?

Postby k.sankar.ra » Tue Jul 05, 2016 6:30 am

This doubt is with regard to the lower of cost or market rule for stocks
as discussed in page 15 of CMA Part I Edupristine study notes.
Let us retain the cost of stocks as in the study notes to be $140,000.

The discussion talks about the market value being
the median (the value lying at the centre) of
1) current purch / reproduction cost (say, $135,000),
2) estimated sale price less disposal costs (say, $150,000 - $20,000 = $130,000) and
3) net realizable value less normal profit margin (say, $150,000 as above - $10,000 = $140,000)
I have slightly changed the values from the example given in the study notes.

ARB 43, Chapter 4, Statement 6 says that item (1) above is the market price or value,
i.e. $135,000, which is the residual utility value of stock.
It also says that (1) $135,000 should not be > (2) $130,000. But, in this case, (1) is > (2).
Then, (2) $130,000 represents the utility value of stock. So, we should ignore (1) $135,000.
Now, since (3) $140,000 is equal to the cost of $140,000 and recovers the cost,
we shall not recognize the loss of $10,000 (i.e., (2) $130,000 less cost $140,000. So, we should ignore (2) $130,000.
Thus, out of the 3 market figures, we shall consider only (3) $140,000.

But, if we apply the median rule for 1) $135,000, 2) $130,000 3) $140,000,
the value lying at the centre is 1) 135,000 as the market figure.

So, is the median rule in compliance with ARB 43 at all ?
Can you explain this please ?

As per ARB 43, the lower of 3) $140,000 and cost $140,000 will be $140,000 as the stock value.
As per median rule as per Edupristine notes, the lower of 1) $135,000 and cost $140,000 will be $135,000 as the stock value.

Return to “CMA”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.