Question

In a recent annual report, Kaiser Aluminum corporation made the following statement in reference to it's inventories: "The company recoded pretax charges of approximately $19.4 million because of a reduction in the carrying values of it's inventories caused principally by prevailing lower prices for alumina, primary aluminum, and fabricated products."

What basic accounting priciple caused Kaiser Aluminum to record this $19.4 million pretax charge? Briefely describe the rationale for this principle.

Answer 1

IAS 2, Inventories, contains guidance for determination of cost of inventories and it's subsequent recognition. It also contains guidance for any write-down to its net realizable value. According to IAS 2, Inventories should be measured at lower of

a). cost

b). net realizable value.

Net realizable value is the estimated selling price in the ordinary course of business less the costs of completion and the estimated costs necessary to make the sale.

Since the selling prices of alumina, aluminium and fabricated products in the market has reduced, the net realizable value takes a corresponding hit, while its cost remains the same. Since, IAS 2, Inventories mandates recording the value of inventory at a lower of cost or NRV and the NRV of inventories has declined as compared to their costs, a corresponding $19.4 million write-off of inventory is disclosed in it'sannual report by Kasier Aluminium corporation.