Inventory
Typical coverage of US GAAP
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Definition and scope
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Perpetual vs. periodic systems
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Physical goods and costs included in inventory
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Effects of inventory errors
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Cost flow assumptions
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Specific identification
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Average cost methods
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First-in, first-out method (FIFO)
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Last-in, first-out method (LIFO) (including dollar-value LIFO)
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Retail inventory method (RIM)
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Lower of cost or market
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Disclosures
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Executive summary
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IFRS does not permit the LIFO method of costing inventory, unlike US GAAP.
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IFRS reports inventory at the lower of cost or net realizable value (LCNRV). US GAAP reports
inventory at the lower of cost or market (LCM), where market is defined as a replacement cost
with a floor (NRV less normal profit margin) and a ceiling (NRV).
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IFRS allows reversals of prior inventory write-downs to be made and recognized in income,
unlike US GAAP.
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Primary pronouncements
US GAAP
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ASC 330, Inventory
IFRS
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Inventory
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IAS 2, Inventories
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Progress on convergence
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On July 15, 2014, the FASB issued an ED
Inventory (Topic 330): Simplifying the
Measurement of Inventory.
Comments are due September 30, 2014.
Inventory would be reported at LCNRV, the
same as the IFRS approach.
The proposed effective date is for annual
periods beginning after December 15, 2015,
with early adoption permitted.
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Definition and scope
US GAAP
IFRS
Inventory includes finished goods, work-inprogress and raw materials.
Similar
Inventory is recognized when the risk and
rewards pass to entity.
Similar
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Definition and scope
US GAAP
IFRS
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Intangible assets produced for resale
(e.g., software) are not included in
inventory.
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Intangible assets produced for resale are
included in inventory.
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ASC 908, Agriculture, is used to scope out
agricultural products and commodities.
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IAS 41, Agriculture, is used to scope out
agricultural products and commodities.
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Perpetual vs. periodic systems
US GAAP
IFRS
Similar
Both systems are allowed.
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Physical goods and costs included in inventory
US GAAP
IFRS
Costs include productions costs, conversion
costs and purchase costs.
Similar
Cost includes freight-in.
Similar
Similar, although certain
conditions must be met.
Interest must generally be capitalized.
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Physical goods and costs included in inventory
US GAAP
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No guidance is provided on storage costs.
IFRS
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Storage costs are usually expensed.
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Cost flow assumptions
US GAAP
IFRS
Specific identification, average cost, FIFO and
RIM are allowed.
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Similar
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Cost flow assumptions
US GAAP
IFRS
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Different cost flow assumptions may
be used for inventory with a similar nature and
use.
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The same cost flow assumptions must be used
for inventory with a similar nature and use even
if inventory is held in different geographic
locations and/or by different entities.
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LIFO method is allowed:
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LIFO method is not allowed:
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The IRS has a conformity rule that requires LIFO
to be used for book purposes if it is used for tax
purposes.
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This is significant to some companies because of
taxation implications. If IFRS is adopted with no
changes made in the current standards and the
current tax laws, then companies will have to pull
the LIFO reserve back into their taxable income
over a four-year period.
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Cost flow assumptions
Analysis of companies as of 2011:
Variable
Mean
Median
Reserve balance (in millions)
$363
$45
Net income (in millions)
$893
$109
LIFO reserve/operating income
50%
17%
LIFO reserve/net income
60%
27%
4%
2%
17%
14%
LIFO reserve/assets
LIFO reserve/inventory*
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Exxon had a reserve of $25.6 billion
in 2011 and $21.3 billion in 2010. In
2011, this was 47% of Exxon’s
operating income, 62% of its net
income and 8% of its assets.
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Central Steel & Wire Co. had a
reserve balance that was 11 times
its operating income and 16 times
its net income in 2011.
*Inventory is the LIFO inventory with the reserve added back.
Analysis of companies as of 2011 using Compustat: 6,432 companies in the sample of which 4,384 companies had
inventory of which 291 companies had a LIFO reserve.
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Lower of cost or market
US GAAP
IFRS
Write-downs of inventories are required in
certain circumstances.
Similar, but specifics vary.
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Lower of cost or market
US GAAP
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Reports at the LCM:
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IFRS
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Market is defined as replacement cost with
a floor (NRV less normal profit margin) and
a ceiling (NRV).
NRV is defined as the estimated selling
price less the estimated costs of completion
and sale.
Reversals of prior write-downs are not
allowed.
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Inventory
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Reports at the lower of cost or net
realizable value (LCNRV):
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NRV is defined as the estimated selling
price less the estimated costs of completion
and sale.
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Since replacement cost would typically be
less than NRV, IFRS will generally result in
lower write-downs than US GAAP.
Reversals of prior write-downs can be
made and recognized in income.
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Lower of cost or market
US GAAP
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Write-down can be done using an
item-by-item, group-by-group or on a
total inventory basis.
IFRS
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Write-downs are typically done on an itemby-item basis:
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Group-by-group basis is allowed under
certain circumstances.
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Since most companies in the US
use an item-by-item basis, significant
differences are not expected.
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Lower of cost or market
US GAAP
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Write-downs must be included as
expense:
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IFRS
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ASC 420-10-S99-3, Exit or Disposal Cost
Obligations – Overall – SEC Materials,
states that inventory write-downs should be
included in cost of goods sold even when
related to an exit or restructuring cost.
ASC 330-10-50-2, Inventory – Overall –
Disclosure, states that if “substantial and
unusual losses” result from the LCM rule
then the loss amount should not be
included in cost of goods sold on the
income statement.
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Write downs and reversals of write-downs
must be included as expense, but a
particular expense account is not
specified.
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Inventory write-down example
Example 1 – inventory write-down
Part 1:
On December 31, 2012, Jets International had an inventory of five different types of airplane
parts. Given the current fuel costs, airplane parts are not as valuable as they once were. The
chart on the next slide provides the cost basis, net realizable value, replacement cost and net
realizable value less normal profit margin as of December 31, 2012.
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What is the amount of write-down (if any) required using
US GAAP on both a total and item-by-item basis? Please
provide the necessary journal entry.
►
What is the amount of write-down (if any) required using
IFRS on both a total and item-by-item basis? Please
provide the necessary journal entries.
Inventory
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Inventory write-down example
Part 1 (continued):
Cost
NRV
RC
NRV-NPM
Part 1
$ 10,000
$ 20,000
$ 15,000
$ 12,000
Part 2
$ 20,000
$ 19,000
$ 18,000
$ 17,000
Part 3
$ 5,000
$ 3,000
$ 4,000
$ 2,000
Part 4
$ 8,000
$ 15,000
$ 12,000
$ 11,000
Part 5
$ 15,000
$ 12,000
$ 9,000
$ 11,000
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Inventory write-down example
Example 1: Part 1 solution:
Original
cost
RC
NRVNPM
US GAAP
market
US GAAP
LCM
IFRS
LCNRV
NRV
Part 1
$10,000
$20,000
$15,000
$12,000
$15,000
$10,000
$10,000
Part 2
20,000
19,000
18,000
17,000
18,000
18,000
19,000
Part 3
5,000
3,000
4,000
2,000
3,000
3,000
3,000
Part 4
8,000
15,000
12,000
11,000
12,000
8,000
8,000
Part 5
15,000
12,000
9,000
11,000
11,000
11,000
12,000
$50,000
$52,000
Item-by-item basis
$58,000
Total basis
$58,000
$69,000
$58,000
$53,000
$58,000
$58,000
Total basis for US GAAP: If the inventory write-down is calculated for the total inventory, there is
no write-down under US GAAP as the LCM value is $58,000 the same as the original cost.
Inventory
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Inventory write-down example
Part 1 solution (continued):
Item-by-item basis:
US GAAP:
IFRS:
Original cost
LCM
Write-down
Original cost
LCNRV
Write-down
$ 58,000
50,000
$ 8,000
US GAAP journal entry:
CGS
Inventory
$ 58,000
52,000
$ 6,000
IFRS journal entry:
$8,000
$8,000
Inventory write-down expense
Inventory valuation allowance
$6,000
$6,000
The amount of inventory write down in this example is $8,000 using US GAAP because the LCM is less than
the original cost. The amount is to be recorded in the income statement to CGS and directly to inventory
because a future reversal of write-downs is not permitted. Using IFRS, the write-down is $6,000 because the
LCNRV is less than the original cost. The write-down is not required to be recorded in a specific income
statement account. A valuation allowance is used because future reversals of write-downs are permitted.
Inventory
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Inventory write-down reversal example
Example 1 – write-down reversal
Part 2:
The airline industry’s business was so terrible during 2013 that Jets International still had the
same five parts in its inventory as of December 31, 2013. However, fuel prices have decreased,
so the outlook is more optimistic. As of the end of the year, Jets International’s original cost
basis, net realizable value, replacement cost and net realizable value less the normal profit are as
shown on the next slide.
►
What is the amount of write-down reversal (if any) required
using US GAAP? Please provide the necessary journal
entry.
►
What is the amount of write-down reversal (if any) required
using IFRS? Please provide the necessary journal entry.
Inventory
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Page 22
Inventory write-down reversal example
Part 2 (continued):
Original
Cost
NRV
RC
NRV-NPM
Part 1
$ 10,000
$ 21,000
$ 16,000
$ 13,000
Part 2
$ 20,000
$ 20,000
$ 19,000
$ 18,000
Part 3
$ 5,000
$ 4,000
$ 9,000
$ 3,000
Part 4
$ 8,000
$ 16,000
$ 11,000
$ 12,000
Part 5
$ 15,000
$ 14,000
$ 10,000
$ 12,000
Inventory
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Inventory write-down reversal example
Example 1:
Part 2 solution:
Original Cost
IFRS LCNRV
December 31, 2012
NRV
IFRS LCNRV
December 31, 2013
Part 1
$ 10,000
$10,000
$21,000
$10,000
Part 2
20,000
19,000
20,000
20,000
Part 3
5,000
3,000
4,000
4,000
Part 4
8,000
8,000
16,000
8,000
Part 5
15,000
12,000
14,000
14,000
$ 58,000
$ 52,000
Total
Inventory
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$56,000
Page 24
Inventory write-down reversal example
Part 2 solution (continued):
No reversal of a write-down is permitted using US GAAP.
IFRS:
December 31, 2013 LCNRV
December 31, 2012 LCNRV
Write-down
$ 56,000
52,000
$ 4,000
Journal entry:
Inventory valuation allowance
Inventory write-down expense
$4,000
$4,000
Since the LCNRV at December 31, 2013 exceeds the LCNRV at December 31, 2012 by $4,000, this amount
is recorded as a reversal to the previous write-down.
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Disclosures
US GAAP
IFRS
Basis upon which amounts are stated
(e.g., LCM) and costing method
Similar
Carrying amounts by classification
Similar
Inventory financing arrangements
Similar
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Disclosures
US GAAP
IFRS
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Requires disclosure of the amount of
write-downs recognized as expense.
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Requires disclosure of both the amount of
write-downs recognized as expense and
any reversal of write-downs.
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Various required disclosures when a firm
uses the LIFO costing method (e.g., the
LIFO reserve or replacement cost must be
disclosed).
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No required disclosures related to LIFO
method since LIFO is not allowed.
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