Hi I’ve got a question for inventory impairment on a company filing based on US GAAP.
Cost per unit is $199
Suppose a company sold 500 units at $500 in the first Q
200 Units in the second Q at $500
and 3rd Q rolls around and the company suddenly decides to reduce its price and liquidate its channel inventory at $199 per unit which is about the production price?
Will the company need to take any write down on its balance sheet for the rest of its inventory in, also will there be a charge on the income statement in Q3?
Also, will the company need to restate its earnings for the prior 2Qs
according to ifrs write down is allowed as well as reversal but in the case of us gaap only writedown is allowed and be mindful of the fact tht ifrs records inventory on the basis of NRV where as ug gaap consider replacement cost and replacement cost have a celing of NRV and a floor of NRV - profit margin… i hope this helps
I think a write down is only necessary when the value of an inventory unit falls below €199. Since this is not mentioned in your problem, I don’t think you need to write down anything. You also do not have to adjust the previous two Qs for the new sales prices per unit. From your statement, the company has sold the units @ €500 each. If the company bought the units for €500 and the market value of a unit today is €199, then you would have to write down.
Thanks! The sanerio actually derived from research in motion,maker of the blackberry. Im doing a little work on this company and was wondering what kind of impact the 199 fire sale will have on its next q earnings. feel free to chip in any input Thanks again…! Good luck writing in Dec all… See u all at the finish line…
Write downs is required when the net relializable value is less than balance sheet cost and Inventory is reported on the lower of balance sheet cost or NRV As per your description, if company start selling @199 and obviously there will some selling cost. so NRV [i.e Estimated selling price - Selling Cost … $199 - $x where x = selling cost] will be less than 199 [balance sheet cost]. so inventory will be written down to NRV and loss should be recognised in income statement. …Let me know if your thoughts on this.
gross margin comes into picture only under US GAAP, where inventory is reported at the lowest of unit cost or replacement cost and the replacement cost have range from NRV [upper range] to NRV minus Profit margin [lower range]. From US GAPP Point of View ---------------------------- Since company’s new selling price is $199 [which is NRV] so replacement value [market] can’t be more than this and at this price there will be no profit margin as well [since the cost per unit is same…company selling at cost price]. suppose Case 1 – Replacement cost is provided as $199, then inventory should be reported @199 and no write downs should be required. Case 2 – Replacement cost is less than $199 , then inventory should be reported @replacement cost and write down would be required in income statement [for amt “Unit Cost – Replacement Cost”]. Since there is no info about replacement cost in question so can’t decide exactly. From IFRS Point of View -------------------------- Write downs is required when the net relializable value is less than balance sheet cost and Inventory is reported on the lower of balance sheet cost or NRV As per your description, if company start selling @199 and obviously there will some selling cost. so NRV [i.e Estimated selling price - Selling Cost … $199 - $x where x = selling cost] will be less than 199 [balance sheet cost].Since NRV [199-$x] is less than unit cost [$199] so inventory will be written down at NRV [199-$x] and loss should be recognised in income statement. Pls let me know if my assumption is correct or not.Thanks.