I know US GAAP requires inventories to be reported at Lower of Cost or Market (LCM). i.e. market value of inventories go up…they are still reported at historical costs. But considering a scenario where The historical costs of inventory is $100 in period 1 Period 2 the market value of inventory goes down to $70, and thus the management writes them down to $70. In Period 3, the same inventory value rises to $90. Can management write UP the value of inventory to $90? It is still less than the historical cost. Or is it a one way street?
delhirocks, my recollection is that upward revaluations aren’t permitted under U.S. GAAP, but are allowed by IAS. Another key area in which IAS differs from GAAP is that IAS permits company discretion as to the cash flow classification of interest and dividends. Please correct me if I’m mistaken.
I don’t believe you can write up traditional inventory (such as raw materials). But, some assets (such as publicly traded stocks) are marked to market which results in an unrealized gain.
I don’t know anything about this, but I would have thought you could. What if your raw material is crude oil or gold or something easily marked to market?
^From my understanding you can mark up inventory of certain commodities.
My thoughts exctly Joey & TMurf…but can’t get a definitive answer anywhere…Thx.
Just sit back and wait for Super I to visit and we’ll get the full scoop.
US GAAP values inventory at Lower of Cost or Market. Inventories can be written down to market, but not written up. IAS GAAP permits write-up of inventory, but if any of inventory is written up, the entire class of inventory must be revalued. General rule in US GAAP is that value of assets can be decreased to market, but not increased. If the value of the asset increases or exceeds book value, that will not be recognized until the gain is realized at the sale or disposal of the asset.
yup thanks Gang…but I am worried about the situation where the market is higher than the current carrying value BUT still lower than the historical cost at which the asset was initially brought to book…see my example above…Thanks
I think we are unnecessarily confusing things, it’s always the LCM rule followed. Schweser states that IAS-GAAP allows write-ups of inventories while US-GAAP prohibits it. So for the example stated above, if the company is following US-GAAP then the book-value should remain at $70, despite the market value going upward to $90. This is what I learn from Schweser, unless someone could throw some light on this issue, as to what actually happens in real when such a situation arises – any Accountants, CPA’s awake to help us out?? - Dinesh S
delhirocks Wrote: ------------------------------------------------------- > yup thanks Gang…but I am worried about the > situation where the market is higher than the > current carrying value BUT still lower than the > historical cost at which the asset was initially > brought to book…see my example above…Thanks Yep. I understood that part of the question. I am not sure where it appears in the text, but I can tell you from experience as an accountant that once you write it down, you don’t write it back up. This is not allowed under US GAAP.
A google search seems to show that US GAAP requires mark-to-market inventory valuation for securities held as inventory at dealer firms (this includes both financial and commodities dealers). Also, when a firm uses a derivative contract to hedge the fair value of their inventory (and the hedge qualifies for accounting purposes), the hedged item (inventory in this case) is marked-to-market.
I think the question here isn’t whether a bond dealer needs to mark his bonds to market or whether derivatives need to be marked to market, it’s about inventory that runs from last year’s clothing to very marketable pricable things like gold bullion at a jeweler.
I agree with you about the question. I was just trying to imply that the above was all I knew/could find. I’ve read before that refined bullion of precious metals is marked-to-market but I’m having trouble confirming it. I do know that inventory items such as clothing, furniture, electronics, etc can never be written-up under US GAAP. I’m pretty sure the only exception to the rule, besides dealer firms and possibly refined bullion (not confirmed), is when the inventory item is hedged (then it follows the hedged item and therefore can be marked up). For instance, Exxon Mobil cannot mark up the value of oil held as inventory unless the oil is hedged and it qualifies as a fair value hedge. Then the oil can be marked up because it now follows the derivative instrument.
Inventories can not be market up to market regardless of what the original cost was. In very rare circumstances you can mark your inventory to market. Here is an analysis… The SEC staff has stated that in extremely rare circumstances the staff will not object to the use of mark-to-market accounting for inventories where all of the criteria in ARB 43 are met and that the circumstances which justify stating inventories above cost are truly exceptional. The staff has stated that this accounting may only be used for inventories of refined bullion of precious metals.
Thanks Stuart…thats what I was looking for.