Lower of Cost or Market
An inventory rule requiring write-down when market value falls below original cost.
What is Lower of Cost or Market?
The lower-of-cost-or-market (LCM) rule requires companies to report inventory at the lower of its historical purchase cost or current market value. Under current U.S. GAAP (ASC 330), "market" is defined as net realizable value — the estimated selling price minus costs to complete and sell. When market prices fall below cost, the inventory must be written down, recognizing the loss in the income statement in the period the decline is identified. This prevents companies from overstating assets on the balance sheet. The rule reflects the conservatism principle: recognize losses when probable, but defer gains until realized.
Example
A retailer holds 1,000 units of electronics at a cost of $200 each ($200,000 total). Due to a new product release, the market value drops to $150 per unit. Under the LCM rule, inventory is written down to $150,000, and a $50,000 loss is recognized on the income statement immediately — even though the units have not been sold yet.
Source: FASB Accounting Standards Codification — ASC 330 Inventory