Basic question regarding an inventory writedown… Company A discovers that the market value of its inventory is only $400, $20 less than the $420 reported at cost on its books. As a result, it takes a “loss due to market decline of inventory” non-cash charge during the next period for $20. As a result, net income is reduced by $20. Over the next year, the company finally begins selling off some its inventory at its market value. Due to its depressed value, its realized net income is $20 less than what it thought it would realize prior to the write-down. My question is, why is the company charged $20 twice? First, it takes a hit because it feels it will lose $20, then it gradually loses the $20 again as it begins realizing that potential loss? Can the company gain back some of the non cash charge by decreasing “loss due to market decline of inventory” as it realizes the actual loss via a lower sales price? Thanks
Why do you think it’s double counting? What I got from the quotes is a $20 one time loss…
Same here. From the way I read it both paragraphs refer to the same accounting period.
You need to understand that one is the potential loss and one is the realized loss. Potential loss is some sort of provision made by reducing the value of the inventory.In this case its the fall in market value. Under IAS 2 , inventory should be carried at lower of cost and Net realisable value. Over the next year it realized that loss of $20 which is what was estimated earlier as a potential loss due to fall in Market value. Therefore no double counting at all.
Nicely put Sumo. Thanks