# GAAP inventory: Lower Cost or Market

Hey guys, Just wondering if anyone has an easy to understand way of explaining lower of cost or market for GAAP inventory. Cost is easy to determine…for “market value”, in the books it says to compare the carrying value to replacement cost, and it must lie between NRV and NRV- profit margin. I’m going through some examples, but still don’t really get exactly how to pin what “market” is. Thanks!

You can think of “market” as the middle value among all these… replacement cost ceiling: NRV=sell price-disposal Floor= NRV-profit marg Market is the middle value. Then you look at historical cost. Then you take lower of cost or market. What’s your email, i’ll send you an example, or if you want to find an example post it here

that looks confusing posted sorry. 1) replacement cost 2) ceiling: NRV: sell price-disposal costs 3) Floor= NRV-profit margin

Thanks Andrew…I think I get it. Basically, in determining mkt value, you do the following: 1) Calculate NRV 2) Calculate NRV - profit margin 3) Compare replacement cost to those two values. If it lies between the 2 values above, then that is the mkt value. If its higher than NRV, bring it down to NRV…if lower than NRV - margin, then bring it up to NRV - margin. 4) After figuring out market value, compare that to original cost, and take the lower of the 2. That sound about right? Also, is the starting “replacement cost” always given, or do we have to calculate that?

Under IFRS, you compare Min(Historical cost, NRV) Under USGaap, it’s more tricky. It is Min (historical cost ; Replacement cost) But the RC itself is determined as the value that lie between (NRV ; NRV - normal profit). Then you have to calculate these valued. Let’s assume HC = 100 NRV = 90, normal profit = 3 and RC = 89 Under IFRS, the booking value will be 90 Under USgaap, NRV = 90 NRV - NP = 90-3 = 87 RC = 89 Then the booking value is Min (100 ; 89) = 89 If RC were = 80, then the booking value would be = 87 If RC were = 92, then the booking value would be = 92 Because RC should lie between (NRV ; NRV - normal profit). thisisbrianly Wrote: ------------------------------------------------------- > Hey guys, > > Just wondering if anyone has an easy to understand > way of explaining lower of cost or market for GAAP > inventory. > > Cost is easy to determine…for “market value”, > in the books it says to compare the carrying value > to replacement cost, and it must lie between NRV > and NRV- profit margin. I’m going through some > examples, but still don’t really get exactly how > to pin what “market” is. > > Thanks!

brianly give me your email i’ll send you a prob

Miss*Yiota Wrote: ------------------------------------------------------- > Under IFRS, you compare Min(Historical cost, NRV) > > Under USGaap, it’s more tricky. It is Min > (historical cost ; Replacement cost) > But the RC itself is determined as the value that > lie between (NRV ; NRV - normal profit). > Then you have to calculate these valued. > > Let’s assume HC = 100 NRV = 90, normal profit = 3 > and RC = 89 > > Under IFRS, the booking value will be 90 > > Under USgaap, NRV = 90 NRV - NP = 90-3 = 87 RC = > 89 > Then the booking value is Min (100 ; 89) = 89 > > If RC were = 80, then the booking value would be = > 87 > If RC were = 92, then the booking value would be = > 92 > Because RC should lie between (NRV ; NRV - normal > profit). > > I think what you meant here was: If RC were = 92, then the booking value would be = 90 This is how I think of it: Under GAAP, Carrying Value of Inventory = Min (Cost, Market Value) Market Value must lie between ‘NRV - margin’ and ‘NRV’ If it is less than this range, Market Value gets bumped up to ‘NRV - margin’ (min change required to get it into range) If it is more than this range, Market Value gets down to ‘NRV’ (min change required to get it into range) So if ‘NRV - margin = 87’ and ‘NRV = 90’ and Cost = 100 If Market value = 89, then it stays the same. Carrying Value of Inventory = 89 If Market Value = 80, then Market Value becomes 87. Carrying Value of Inventory = 87 If Market Value = 92, then Market Value becomes 90. Carrying Value of Inventory = 90

> > So if ‘NRV - margin = 87’ and ‘NRV = 90’ and Cost > = 100 > If Market value = 89, then it stays the same. > Carrying Value of Inventory = 89 > If Market Value = 80, then Market Value becomes > 87. Carrying Value of Inventory = 87 > If Market Value = 92, then Market Value becomes > 90. Carrying Value of Inventory = 90 Thanks anish. So is “market value” the same thing as “replacement cost”? Seems like those 2 terms are used in the same context.

AndrewUNH Wrote: ------------------------------------------------------- > brianly give me your email i’ll send you a prob Andrew, email me at airlyss at yahoo.com

thisisbrianly Wrote: ------------------------------------------------------- > Thanks anish. So is “market value” the same thing > as “replacement cost”? Seems like those 2 terms > are used in the same context. I am inclined to say ‘Yes’ according to my understanding. Someone a little more technical can confirm it.