## 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 ?

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.