Changes in Inventory Valuation Method

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alpha668's picture

CFAI Curriculum Vol 3, P.384,  I have following questions :

1.  Is it that historical information shall be restated for for any change in inventory valuation method under IFRS

2. It is stated clearly that a restrospective restatement of inventory and retained earnings is required for a change from LIFO to another inventory valuation method under US GAAP. However, Is it that historical information shall be restated too for other changes in inventory valuation method (other than from LIFO to another inventory valuation Method) under under US GAAP

Thanks in advance !

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S2000magician's picture

Any change in an accounting principle (inventory method, depreciation method, that sort of thing) requires restatement of prior-year financial statements as if the new principle had been used historically.  Under both IFRS and US GAAP.

Simplify the complicated side; don't complify the simplicated side.

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alpha668's picture

S2000magician,

Thanks for your quick response !

My confusion is that  only the ”restrospective restatement of inventory and retained earnings is required for a change from LIFO to another inventory valuation method” under US GAAP” is stated.

So, actually, IFRS and US GAAP have completely same requirements with regard to the “chahges in inventory valuation method” ? 

S2000magician's picture

alpha668 wrote:
S2000magician,

Thanks for your quick response!

My pleasure.

alpha668 wrote:
My confusion is that  only the ”restrospective restatement of inventory and retained earnings is required for a change from LIFO to another inventory valuation method” under US GAAP” is stated.

So, actually, IFRS and US GAAP have completely same requirements with regard to the “chahges in inventory valuation method”?

IFRS and US GAAP have completely the same requirements with regard to changing in accounting principles/methods: they are applied retrospectively.

Changes in accounting estimates, however, are applied prospectively (only from the current period forward); examples would be changing useful lives or salvage values in depreciation, changes in estimates of bad debts, changes in estimated returns, discount rate, length of service, and salary growth rate for pensions, extimates of warranty expenses, and so on.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

alpha668's picture

As always, thank you so much for your clear explanations !

S2000magician's picture

alpha668 wrote:
As always, thank you so much for your clear explanations!

Thanks for your kind words.  I’m happy to help.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

TinyBeluga's picture

Hi S2000Magician, are you quite sure that US GAAP requires retrospective restatements if a change is not from LIFO to a non-LIFO method?  I understood the CFAI text to imply that US GAAP requires restatements only if the change is from LIFO to a non-LIFO method…

Thanks!

S2000magician's picture

TinyBeluga wrote:
Hi S2000Magician,

Howdy.

TinyBeluga wrote:
… are you quite sure that US GAAP requires retrospective restatements if a change is not from LIFO to a non-LIFO method?  I understood the CFAI text to imply that US GAAP requires restatements only if the change is from LIFO to a non-LIFO method…

Unless they’ve changed the standard from 2012 to 2103, I’m sure.

TinyBeluga wrote:
Thanks!

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Wojtek's picture

I have to go with TinyBeluga on this one :) This is a quote from pg 384 of the Level 1 FRA book:

If a company decides to change from LIFO to another inventory method, U.S. GAAP require a retrospective restatement of inventory and retained earnings. Historical financial statements are also restated for the effects of the change. If a company decides to change to the LIFO method, it must do so on a prospective basis. Retrospective adjustments are not made to the financial statements. Instead, the carrying value of inventory under the old method will become the initial LIFO layer in the year of LIFO adoption.

take care!

S2000magician's picture

Thanks, guys.

That’s a new treatment; I’ll remember it.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

alpha668's picture

Wojtek wrote:

I have to go with TinyBeluga on this one :) This is a quote from pg 384 of the Level 1 FRA book:

If a company decides to change from LIFO to another inventory method, U.S. GAAP require a retrospective restatement of inventory and retained earnings. Historical financial statements are also restated for the effects of the change. If a company decides to change to the LIFO method, it must do so on a prospective basis. Retrospective adjustments are not made to the financial statements. Instead, the carrying value of inventory under the old method will become the initial LIFO layer in the year of LIFO adoption.

take care!

Do you mean that that historical information shall be restated too for other changes in inventory valuation method (other than from LIFO to another inventory valuation Method) under under US GAAP ?  This is exactly what my confusion.

The key point here is why “a retrospective restatement of inventory and retained earnings is required for the change from LIFO to another inventory under US GAAP” is mentioned ? Does this actually mean (imply) that no retrospective restatement of inventory and retained earnings is required for other changes (e.g.,  from FIFO to another inventory)” under US GAAP ? 

Further clarification is appreciated !

TinyBeluga's picture

Hi Alpha668, I think that Wojtek, S2000magician, and I are agreeing that US GAAP requires historical restatements if the change is from LIFO to a non-LIFO method.  If the change is from non-LIFO to LIFO, then only a prospective reflection in statements is required.  Hope this helps.

The CFA book doesn’t mention what would happen if a company decided to switch from FIFO to WTD Average method though or vice versa – I am assuming that this won’t come up in the exam questions since the exam is only based on what the books have! :)

alpha668's picture

TinyBeluga wrote:

Hi Alpha668, I think that Wojtek, S2000magician, and I are agreeing that US GAAP requires historical restatements if the change is from LIFO to a non-LIFO method.  If the change is from non-LIFO to LIFO, then only a prospective reflection in statements is required.  Hope this helps.

The CFA book doesn’t mention what would happen if a company decided to switch from FIFO to WTD Average method though or vice versa – I am assuming that this won’t come up in the exam questions since the exam is only based on what the books have! :)

As it is a blur in CFAI text, I will follow you 3, unless there is a clarification from CFAI. Of course, it will be benefical if someone can ask CFAI to clarify.

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