Can someone please explain this to me: For inventory write downs and subsequent recoveries, why are the COGS reduced in the income statement by the amount of the recovery, under IFRS obviously as GAAP doesn’t allow write ups? To me this seems odd because if the value of the inputs of production have risen, shouldn’t in fact COGS be higher because it would cost more to make the same product? I am not really sure why this isn’t sinking into my brain like it should be, it’s just one of those points I guess. I did email the instructors at Schweser, when I get a response I will post it, in case anyone is having this same issue.
Think in simple balance sheet terms:
If you are writing up inventory due to a recovery, then your assets are going up. This increase is also reflected in the Income Statement. There is no rule under IFRS that the effect of an inventory recovery must be shown as part of COGS but if it is, and let’s remember that a recovery means good news, the opposite of an expense, the effect will be the shown as a negative expense, or simply a reduction of cost of goods sold.
At the end of the day, this reduction has a positive impact on earnings which get transferred to Retained Earnings withing Equity in the balance sheet. So, on the one hand, your assets go up and on the other Equity goes up as well to keep the balance sheet in balance.
hope this helps.
COGS will be higher: next year, when you start selling the inventory that has increased in value this year.
(The thought you have to bear in mind constantly is that inventory valuation systems are purely accounting constructs: they generally aren’t required to conform to the actual flow of goods, and, in fact, they rarely do. Thus, this particular discrepancy, while annoying, perhaps, should not be surprising.)
Not really on point.
The point is that they’re not reducing COGS this period, they’re only reducing inventory.