FRA Inventory Write down question

CFA Level I
#1

Hi guys,

Here is the question I cannot understand. Here you go.

The following information is avaiable about a manufacturing company:

Cost of ending inventory computed using FIFO, 4.3m

Net Realizable value 4.1m

Current Replacement Cost 3.8 m

If the company is using IFRS, instead of GAAP, its COGS is most likely;

A. 0.3 lower

B. the same,

C. 0.3 higher.

My rationale is, carrying value > Net Realizable Value, so write down the original carrying value to Net realizable value, then COGS will not be affected.

ANS: C

Please help guys!

Thank you!

#2

First, I’m pretty sure the answer is A. Not C.

Second, write-downs on inventory are expensed as COGS.

Does that bridge the gap for you?

#3

I also get A.

Under US GAAP, the write down would be to current replacement cost - 3.8m

Under IFRS, the write down would be to NRV - 4.1m

So under IFRS, 0.3m less would be written down, and since write downs are added to COGS, COGS would be 0.3m lower.

Are you sure the questions and answer are shown correctly? Anyone else come across this question?

#4

why is the answer not 0.2mill? I came across this and i thought it was wrong.

#5

From the IFRS perspective, the inventories will be written down to NRV of 4.1 mil from orginal cost of 4.3 mil. Since we will take the lower values, therefore under IFRS the write down is -0.2mil.

However from US GAAP perspective, we take on the lower of NRV or market. In this case, since market (replacement cost) is lower then NRV, the inventories are further written down to 3.8 mil. A -0.5 mil loss is recorded under GAAP.

IFRS therefore will have 0.3mil less write down. -0.2 is higher then -0.5 lol, therefore 0.3mil higher.

I just ignored the term COGS because I thought it was pretty misleading. If I see questions like this on the exam, I would just focus on putting numbers together.

#6

oh shoot!