Accounting Research Bulletin No. 43: Inventory, Goodwill, GAAP

Accounting Research Bulletin No. 43 is the 1953 document that pulled 14 years of scattered U.S. accounting guidance into a single reference and set the foundation for modern GAAP. It was issued in June 1953 by the Committee on Accounting Procedure (CAP), a body within the American Institute of Certified Public Accountants (AICPA), and it canceled and replaced the 42 individual Accounting Research Bulletins that had been published one at a time since 1939.¹ Its rules on working capital classification, inventory valuation, intangible assets, and depreciation shaped decades of financial reporting, and several of them still govern practice today through the FASB’s Accounting Standards Codification.

Why the Bulletin Was Issued

Between 1939 and 1953, CAP addressed accounting questions as they came up, one bulletin at a time. The result was guidance that was hard to find, occasionally inconsistent, and awkward to apply. ARB No. 43 restated the guidance that still held up, revised the parts where practice had moved on, and organized the whole thing into 15 chapters covering distinct areas of financial reporting.¹

Four of those chapters did the heavy lifting: Chapter 3 on working capital, Chapter 4 on inventory pricing, Chapter 5 on intangible assets, and Chapter 9 on depreciation. Some have been deleted from the active document as later standards replaced them. Others are still in force.

Chapter 3: Current Assets and Current Liabilities

Before Chapter 3, there was no uniform standard for deciding which items on a balance sheet counted as “current.” That made it hard to compare one company’s short-term financial position against another’s, and it made ratios like the current ratio unreliable across companies.

ARB No. 43 defined current assets as cash and other resources reasonably expected to be turned into cash, sold, or used up within one year or the company’s normal operating cycle, whichever is longer.¹ Cash, accounts receivable, inventory, and short-term investments all qualify. The operating-cycle qualifier matters for industries like construction or distilling, where the production cycle routinely stretches past 12 months.

Current liabilities were defined as obligations expected to be settled using current assets or by creating other current liabilities within the same timeframe.¹ Accounts payable, wages owed, and the near-term portion of long-term debt all fit. The chapter carved out one useful exception: a debt maturing soon but expected to be refinanced is not classified as current, which prevents a company from looking artificially illiquid because of a technicality in its loan schedule.

The difference between current assets and current liabilities is working capital. Creditors have relied on that number ever since as a quick check on whether a business can cover its near-term bills, and the current ratio, calculated as current assets divided by current liabilities, works only because companies classify the two categories the same way. That consistency traces directly back to Chapter 3.

Chapter 4: Lower of Cost or Market for Inventory

Chapter 4 took on a harder problem: how to value inventory when conditions have changed since the company bought or produced it. The answer was conservative. Inventory is carried at original cost unless its value has dropped, in which case the company writes it down and takes the loss immediately.¹ This is the “lower of cost or market” rule. If goods have lost value through damage, obsolescence, or falling prices, carrying them at purchase price would overstate assets and defer a loss the company has already suffered.

What Counts as Cost

Cost meant the total expenditure to bring the item to its existing condition and location. Because companies buy and produce inventory continuously, they need a systematic method to decide which costs attach to which units. ARB No. 43 accepted first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted-average cost, among others. A company picked the method that most clearly reflected its periodic income and was expected to apply it consistently.

What Counts as Market

The technically important part of Chapter 4 was its definition of “market.” Start with replacement cost, meaning what the company would have to pay today to acquire or reproduce that inventory. Then constrain that number with a ceiling and a floor.¹

The ceiling is net realizable value: estimated selling price minus the costs still needed to complete and sell the goods. Market never exceeds this figure, because you would never value inventory above what you actually expect to collect. The floor is net realizable value minus a normal profit margin. That prevents a company from writing inventory down so aggressively that it guarantees an inflated profit when the goods eventually sell.

The mechanics are straightforward once you know the boundaries. If replacement cost sits between the ceiling and the floor, use replacement cost as market. If it exceeds the ceiling, use the ceiling. If it falls below the floor, use the floor. Then compare that market figure against original cost and carry the inventory at whichever is lower.

What Changed in 2015

For most companies, the ceiling-and-floor analysis is now history. In 2015, FASB issued ASU 2015-11, which simplified the measurement for inventory valued under FIFO, weighted-average, and similar methods. Those companies now compare cost against net realizable value and carry inventory at the lower of the two, with no replacement cost analysis and no floor calculation.² Companies that use LIFO or the retail inventory method were excluded from the update and still follow the original ARB No. 43 framework. That is one reason the older rules still matter in practice.

Chapter 5: Intangible Assets and Goodwill

Chapter 5 created the first standardized framework for putting assets you cannot physically touch on the balance sheet: patents, copyrights, franchises, and goodwill. It split them into two groups.

Intangibles with a clearly limited life, like a patent that expires after a set number of years, had to be amortized over their legal or economic life, whichever was shorter. Intangibles with no obvious expiration date, most importantly purchased goodwill, could sit on the balance sheet indefinitely without mandatory amortization as long as there was no evidence they had lost value. The rules applied only to externally acquired intangibles. Internally developed items like brand recognition or a trained workforce were expensed as costs were incurred, a distinction that still holds in GAAP.

Chapter 5 has since been deleted from ARB No. 43 because later standards replaced it entirely.¹ APB Opinion No. 17 in 1970 reversed the indefinite-life approach and required all purchased intangibles, including goodwill, to be amortized over no more than 40 years.³ That rule held until 2001, when SFAS No. 142 eliminated mandatory amortization and moved goodwill to an annual impairment-testing model. In 2014, FASB gave private companies the option to go back to straight-line amortization over ten years instead of impairment testing.⁴

Chapter 9: Depreciation of Fixed Assets

Chapter 9 covered property, plant, and equipment. The central principle was that a long-lived asset’s cost should be spread across the periods it helps generate revenue. ARB No. 43 described depreciation as “a process of allocation, not of valuation,” drawing a sharp line between systematic cost spreading and any attempt to track what the asset might sell for on the open market.¹

Several methods were acceptable. Straight-line allocates an equal amount to each year. Accelerated methods like declining balance front-load more expense into earlier years. Any method was fine so long as it was systematic and rational, and companies were expected to apply their chosen method consistently. Switching was treated as a significant change in accounting principle and required disclosure.

The chapter took a firm stance against writing up asset values. Property, plant, and equipment should not be recorded above cost, even when appraisals or market conditions suggested higher values.¹ If a company had previously recorded appreciation on its books, depreciation had to be calculated on the written-up amount. The bulletin also rejected one-time write-downs of plant costs meant to reflect high wartime or postwar prices, favoring adjusted systematic depreciation over any lump-sum revaluation. These positions reinforced the historical-cost foundation that still underpins U.S. GAAP for fixed assets.

Where ARB No. 43 Sits in GAAP Today

ARB No. 43 was the highest accounting authority in the U.S. for years after its release, but the institutional structure around it kept changing. The AICPA replaced CAP with the Accounting Principles Board (APB) in 1959, and the APB’s opinions gradually modified or superseded individual chapters. In 1973, the Financial Accounting Standards Board replaced the APB, and the SEC formally recognized FASB as the designated private-sector standard-setter.⁵ FASB’s statements continued replacing pieces of ARB No. 43 over the following decades.

The final structural change came in 2009, when FASB launched the Accounting Standards Codification, reorganizing thousands of pronouncements, including the surviving portions of ARB No. 43, into roughly 90 topics under a single searchable system.⁶ The Codification became the sole authoritative source of U.S. GAAP for periods ending after September 15, 2009. You will not see “ARB No. 43” cited in a modern financial statement. But the working capital classifications from Chapter 3, the inventory rules still applied by LIFO and retail-method companies from Chapter 4, and the allocation-not-valuation view of depreciation from Chapter 9 all remain embedded in the Codification that governs financial reporting today.

1
Financial Accounting Standards Board. ARB 43 Restatement and Revision of Accounting Research Bulletins
2
Financial Accounting Standards Board. ASU 2015-11 Inventory Topic 330
3
Financial Accounting Standards Board. Summary of Statement No. 142
4
Financial Accounting Standards Board. ASU 2014-02 Intangibles Goodwill and Other Topic 350
5
U.S. Securities and Exchange Commission. Reaffirming the Status of the FASB as a Designated Private-Sector Standard Setter
6
Financial Accounting Standards Board. FASB Accounting Standards Codification Launches July 1 2009