I have 2 questions (pertaining to Inventory Accounting) for your kind consideration.
I understand from Schwser notes that under IFRS; inventories on balance sheet are reported at the lower of COST or NRV; whereas under U.S. GAAP; inventories are reported at the lower of COST or MARKET. Cost flows assumptions such as LIFO, FIFO and WA are where companies are given the choice to value their inventories.
Question 1: I think I’m rather confuse with cost flow assumptions and inventories valuation methods required by accounting standard boards (i.e. IFRS, U.S. GAAP) Take IFRS for example, can I say the COST is really derived from the cost flow assumptions? Say if a company( following IFRS) uses LIFO and value their closing inventory at $5 per unit. However, the NRV per unit is $3. Hence following IFRS, the closing inventories are reported as $3 per unit. Am I correct?
Question 2: I understand from study session 9 (LOS 29.f) that under IFRS, in the event when NRV per unit is lower than cost per unit; the inventories will be written down to NRV and the “loss” is recongised in the income statement; thereafter if there is subsequent recovery in value, the “gain” will be recongised in the income statement by REDUCING COGS. I will like to ask whether for the case of “writting down”; which part of the income statement will the recongised loss be recorded? Add to COGS?
Inventory cost flow assumption deals with how the cost (COGS) will be allocated to the inventory.
Inventory valuation method deals with how the inventory will be valued on the Balance Sheet.
Yes
Yes, $3 worth of Inventory on the Balance Sheet.
I saw somewhere that companies have 2 options. One is to report inventory write-down as an increase to the COGS and reversal of inventory write down (Under IFRS) as a decrease to COGS. The second option is report the inventory write down as a non-operating item. However, I have observed that companies use the first option only. (adjustment to the COGS)
You are. Note, however, that under LIFO you will have old costs in inventory, so it is less likely that NRV will be less than cost than it would be if you were using FIFO, which would have new (presumably higher) costs in inventory.
When the amount is material, it will be reported separately, as “Inventory write-down” or something similar. When the amount is immaterial, it is simply added to COGS.
Appreciate the help!