Getting conflicting info… My studyguide says for IFRS, the reversal of inventory write down is a gain on the income statement, up to the original write down amount. As written straight from an example in the notes: “Under IFRS, Zoom will write up inventory to $210 per unit and recognize a $7 gain in its income statement. The write-up (gain) is limited to the original writedown of $7. The carrying value cannot exceed original cost.”
However, one of the practice questions, I got it wrong and the explanation is:
“Under IFRS, the reversal of an inventory writedown is not recognized as a gain, but instead as a reduction in the cost of sales for the period.”
Which one is right? I assume the first is right and the practice question mesesd up? Sounds like USGAAP and not IFRS?
When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs. T he amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.
Still not getting it… shrug… According to IAS2.34, the reversal of a write-down is only a reduction in the amount of inventories recognized as an expense … It doesnt say anything about a gain on the income statement. I understand a reduction in expense will increase income, but the example below is flat out saying reporting a gain on income without talking about reduction in expense.
However, why does this example say it because a gain in the income statement up to the original writedown for IFRS.
Example: Inventory write-up
Assume that in the year after the writedown in the previous example, net realizable value and replacement cost both increase by $10. What is the impact of the recovery under IFRS and under U.S. GAAP?
Answer:
Under IFRS, Zoom will write up inventory to $210 per unit and recognize a $7 gain in its income statement. The write-up (gain) is limited to the original writedown of $7. The carrying value cannot exceed original cost.
Under U.S. GAAP, no write-up is allowed. The per-unit carrying value will remain at $197. Zoom will simply recognize higher profit when the inventory is sold.
Hmm I think Im getting it… so the schwezer notes are misleading because I thought a writedown of inventory is directly a loss on the income statement, so a writeup is a gain on the income statement…
Sounds like a writedown of inventory just increases cogs which then indirectly decreases income statement, so a writeup on inventory deceases cogs which then is a gain on income…
Now, question is, how is this different with GAAP? Can;t writeup but you just recognize more profit when the inventory is sold? How does that work?
In both cases this is an impact on GP part of P/L only and that’s related to inventories usage in production/sales process. Standard just tends to avoid misrepresentation and manipulation. Simply, if you wrote down inventories in previous period and decreased increased a GP, you should record a reversal in GP, too. Not put reversal entry into other parts of EBIT like in overheads, sundry etc. and thus misrepresent Sales figures of P/L.
PS
Just made a correction so it’s more clear how is this an area of high manipulation.