Accounting for Declines and Recoveries of Inventory Value

Hello everyone, I do not really understand the writedown, holding inventory, net realisable value, the value of inventory and the carrying amount on the balance sheet. Anyone can help to explain ? Thanks a lot.

Suppose you purchase inventory at 500. You record it over your balance sheet as Inventory carrying value. It expected that you can sale it above 500. After some time you realize that at any cost it cannot be sold above 450 and the estimated cost of selling this inventory is 10. Your carrying value is 500. Standards here direct you to write down the carrying value of inventory (which is based on historical cost).

NRV = Estimated Sale price - Selling cost

In this case the NRV = 450 - 10 = 440

Under IFRS if carrying value is < NRV then inventory is written down to NRV.

In this case the inventory will be written down to 440 and that will be the carrying amount onwards.

Subsequent revaluation is allowed but not greater than the original carrying amount.

Under USGAAP the carrying value is checked against the market. If Market is > NRV then Market is NRV and Market < NRV - Normal Profit margin then Market = NRV - Normal Profit Margin.

Inventory is written down to market and subsequent upward revaluation is not allowed.

Considering the prevoius example is normal profit margin is 20 then If Market is 460 and NRV = 440 and historical carrying cost is 500 then Market is 440. Inventory will ve written down to 440

If market is 410 and NRV - Normal Profit Margin is 420 (440 - 20) then market is 420. Invnetory will be written down to it.