Rules Cost

How do I apply the lower-of-cost-or-market rule when the price has increased for my products? Say my product was purchased (10 items) for $10 each. Now the price is $15/item. How do I apply the LCM? Is it 10*10=100, or is it 10*15=100 now the the market/replacement cost is more? The lower of cost or market tenant states that after you calculate the cost of your inventory, you report that cost, unless the market value of the inventory has decreased to below cost, at which point you report the market value. In your example you bought at $10 a unit. The market value (replacement value) is now $15/unit. Thus, the cost of your 10 items is $100. The market is HIGHER, and you never mark the cost UP to the market value, only down in cases where market is lower (with the exception of the case of an acquisition). Thus $100 in your example is the cost of the inventory. (note: there are numerous costing conventions to choose between for costing inventory and its the lower of the cost ($100) and market ($150). You apply these conventions FIRST to determine cost, and then compare them to market to make sure you don't have an impairment issue. The most common inventory costing conventions are First in first out (FIFO), Last in first out (LIFO), average cost, and specific identification. You can choose to use whichever costing method you like, but you need to be consistent across reporting periods. This decision and the calculation where you apply the tenant is likely to have more of an effect on the cost of inventory the the Lower or cost or market tenant). Good luck.

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Rule 144 Holding Periods Shorten

The SEC (Securities and Exchange Commission) voted unanimously on November 15, 2007 to cut the required holding period in half from twelve to six months for selling restricted and control securities.

This exciting change will go into effect on February 15th, 2008. The change will bring a welcome relief to many smaller companies, because the shorter holding period is intended to lower the cost of capital and make it more accessible to those companies.
While this is exciting news for many and its effects will be far-reaching, the matter can be a bit confusing. Here is a brief overview.

What are Restricted or Control Securities?

A restricted security is paper certificate that proves ownership of a stock that was issued in an unregistered or private sale from a company or an affiliate of the company. Restricted securities are usually sold to investors or given as employee benefits.

Control securities are usually held by affiliates or shareholders of a company that have the power to direct the company. When the affiliate sells these control securities, they become restricted securities for the purchaser.
When a security is restricted, it will usually have a "restricted" legend stamped on it. This legend must be removed before the security can be sold to the public. To remove the legend, the conditions of Rule 144 must be met and the issuer's approval given before a transfer agent, such as First American Stock, can legally remove it.

What is Rule 144?

Rule 144 is a Securities and Exchange Commission rule created under the Securities Act of 1933. This rule defines conditions that must be met prior to the sell of a restricted security. The rule stipulates the following five conditions:

1. The required holding period must be met (the reduced holding period is six months as opposed to one year).

2. There must be adequate current information about the issuing company, meaning that it is keeping up with its reporting requirements.

3. The trading volume formula is met. This formula stipulates that no more than 1% of a company's outstanding shares can be sold in any 3-month period and that they must be less than 1% of the of the company's average trading volume over the past month.

4. That routine trading conditions, which apply to all trades, have been met.

5. That Form 144 is filed with the SEC prior to selling more than 500 shares or shares worth more than $10,000 within a three-month period.

Restricted securities can also be sold, freely without the restrictions of Rule 144 after two years if the seller is not affiliated with the security issuer.

What difference will the changes to holding periods make?

The short answer is many. The shorter required holding period on restricted securities was intended to help smaller companies raise capital and to expand the availability capital, but the effects will reach beyond the small company spectrum.

According to John W. White, the Director of the SEC's Division of Corporate finance, "The revisions to Rule 144 should make it more efficient for companies of all sizes to access private markets. In the coming months, we expect to recommend that the Commission finalize additional rules that will further promote capital formation by smaller companies."

Essentially, the changes to Rule 144 will help an old rule keep up with the new market.

About the Author

By Amy Vincent, sponsored by First American Stock Transfer, Inc., registered with the Securities & Exchange Commission as a Registrar and
Stock Transfer Agent
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http://www.firstamericanstock.com
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