Subject 5. Measurement of Inventory Value PDF Download
Under IFRS, inventories are reported at the lower of cost or net realizable value (NRV).
IFRS does not apply to the measurement of inventories held by producers of agricultural and forest products, mineral products, or commodity brokers and dealers. Their inventories are measured at net realizable value (above or below cost) in accordance with well-established practices in those industries.
Similarly, GAAP requires the use of the lower-of-cost-or-market valuation basis (LCM) for inventories, with market value defined as replacement cost. Reversal is prohibited, however. The LCM valuation basis follows the principle of conservatism (on both the balance sheet and income statement) since it recognizes losses or declines in market value as they occur, whereas increases are reported only when inventory is sold.
Here are some relevant terms:
- Net realizable value: Estimated selling price less estimated costs of completion necessary to make the sale.
- Historical cost: The cash equivalent price of goods or services at the date of acquisition.
- Market value (Replacement cost): The cost that would be required to replace an existing asset.
- Fair value: The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
Historical cost: $5,000
Market cost: $2,000
Estimated selling price: $4,000
Estimated costs to complete sale: $1,000
Net realizable value: $4,000 - $1,000 = $3,000
- Inventory Valuation under IFRS: $3,000 (the lower of historical cost and NRV).
- Inventory Valuation under U.S. GAAP: $2,000 (the lower of historical cost and market cost).
Now assume NRV increases from $3,000 to $4,000 and the market cost increases from $2,000 to $3,000.
- Under IFRS, $1,000 of original write-down may be recovered to bring NRV up from $3,000 to $4,000. Note that reversals are limited to the amount of the original write-down ($2,000).
- Under U.S. GAAP, the value of inventory is $2,000 even though the new market value is $3,000. No adjustment is made and reversal is prohibited.
User Contributed Comments 8
|romi||there are not disadvantages and advantages of the firm that using FIFO|
|charliedba||The advantages and disadvantages of FIFO are the opposites for LIFO.|
|geok||any other examples of ISA and US GAAP on decline in inventory value? am still not clear no this|
|xenamy||Isn't fair value also market value?|
|tll936||what the meaning of "passage of title" rule?
|Sdeni||Note that Inventories for Agricultural and Forest products, producers of Minerals and Mineral Products, Commodity broker-traders are measured at NRV always.|
|choas69||i thought cost flow assumption includes LIFO FIFO and WAC, but specific identification matches costs with the actual physical flow of goods.
please i need someone to clarify this to me.
|breh||These are good notes|
I was very pleased with your notes and question bank. I especially like the mock exams because it helped to pull everything together.
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