Under IFRS inventories are measured at lower of cost or NRV.
Under US GAAP it works a different way that I don`t understood can someone clarify this for me and maybe give me a example for both?
IFRS
Scenario 1:
Cost = $100 (In Balance Sheet)
NRV = $80
Inventory = Lower of $100 and $80 = $80
Result: Inventory value (BS) written down from $100 to $80; loss of $20 recognised in income statement
In subsequent years, if there is a reversal, you can reverse up to a maximum of $20. e.g. If the inventory value jumps to $105 in the next year (just an extreme), then we will recognise $20 in gain (instead of $25).
Scenario 2:
Cost = $100 (In Balance Sheet)
NRV = $120
Inventory = Lower of $100 and $120 = $100
Result: No change in inventory value; no loss recognised.
1 Like
US GAAP
Scenario 1 :
Cost = $100 (In Balance Sheet)
(A) NRV = $80
(B) NRV less normal profit margin = $70
Replacement cost = $76
Replacement cost is between (A) and (B), so market = replacement cost = $76.
Inventory = Lower of $100 and $76 = $76
Result: Inventory value (BS) written down from $100 to $76; loss of $24 recognised in income statement
Reversal is not allowed in subsequent periods.
Scenario 2 :
Cost = $100 (In Balance Sheet)
(A) NRV = $80
(B) NRV less normal profit margin = $70
Replacement cost = $83
Replacement cost is greater than (A), so market = NRV = $80.
Inventory = Lower of $100 and $80 = $80
Result: Inventory value (BS) written down from $100 to $80; loss of $20 recognised in income statement
Reversal is not allowed in subsequent periods.
Scenario 3 :
Cost = $100 (In Balance Sheet)
(A) NRV = $80
(B) NRV less normal profit margin = $70
Replacement cost = $68
Replacement cost is less than (B), so market = NRV less normal profit margin = $70.
Inventory = Lower of $100 and $70 = $70
Result: Inventory value (BS) written down from $100 to $70; loss of $30 recognised in income statement
Reversal is not allowed in subsequent periods.
Scenario 4 :
Cost = $73 (In Balance Sheet)
(A) NRV = $80
(B) NRV less normal profit margin = $70
Replacement cost = $76
Replacement cost is between (A) and (B), so market = replacement cost = $76.
Inventory = Lower of $73 and $76 = $73
Result: No change in Inventory value; no loss recognised.
Reversal is not allowed in subsequent periods.
Thanks that was a really good example, so for US GAAP its the lower of cost or market, right? For the market we will use replacement cost if its between upper bound (NRV) and lower bound (NRV less a normal profit margin)?
If the replacement cost is higher than upper bound (NRV), we will use upper bound (NRV),
If the replacement cost is lower than lower bound (NRV less a normal profit margin), we will use lower bound (NRV less a normal profit margin)
If the replacement cost is between both we use it`s value.
2 Likes