Question

Beech Corporation has three finished products (related to three different product lines) in its ending inventory at December 31, Year 1. The following table provides additional information about each product:

Product	Cost	Replacement Cost	Selling Price	Normal Profit Margin
101	$130	$140	$160	20%
202	$160	$135	$140	20%
303	$100	$80	$100	15%

Breech Corporation expects to incur selling costs to 5% of the selling price on each of the products.

Required: Determine the amount of at which Breech should report its inventory on the December 31, Year 1, balance sheet under (1) IFRS and (2) U.S. GAAP

Answer 1

Valuation Rules in GAAP and IFRS:

In IFRS Inventory is Measured at Cost and or Net Realizable Value whichever is lower. Whereas the Net Realizable value is the best estimation of how much Inventory are expected to realize.

In US GAAP Inventory is recorded at cost and market value whichever is lower whereas market value is define as current replacement cost as limited by net realizable value. Further net realizable value is equal to estimated selling price less reasonable cost associated with a Sale.

1. calculation of Net realizable value:

Product	Selling Price in $	Selling Cost 5% of Selling Price	Net realizable value
101	160	8	152
202	140	7	133
303	100	5	95
		Total	380

2. Inventory valuation in IFRS:

Product	Cost in $ (A)	NRV in $ (B)	Inventory Value A or B whichever is Lower
101	130	152	130
202	160	133	133
303	100	95	95
		Total	358

3. Inventory valuation in GAAP:

Product	Replacement cost (A)	Net realizable value (B)	market value C = Lower of A or B	Cost D	Inventory Value C or D whichever is Lower
101	$140	$ 152	$1 40	$ 130	$ 130
202	$135	$ 133	$ 133	$ 160	$ 133
303	$ 80	$ 95	$ 80	$ 100	$ 80
				Total	$ 343

IF Inventory Calculated on Total Basis:

In GAAP

COST = 130+160+100 =390

Replacement Cost = 355

NRV = 380

Hence, Inventory value = $ 355

In IFRS (IFRS not allowed to Calculate Inventory on total basis)

Cost = $390

NRV = $380

Hence, Inventory value = $ 380