Question

Generally Accepted Accounting Principles (GAAP) allow companies to choose any inventory costing method. GAAP also requires that companies consistently stick to one method. However, companies do switch back and forth from FIFO to LIFO to Weighted Average and vice versa. International Financial Reporting Standards (IFRS) value inventory in a similar method as GAAP. Companies can use FIFO or average costs, but LIFO is not an option. Access and review the following article from the CSU-Global Library:

Krishnan, S. (2012). Inventory Valuation Under IFRS and GAAP. Strategic Finance, 98(9), 51-58.

Select one item from the article that you found interesting and briefly share your views on valuating inventory under GAAP versus IFRS. What ethical responsibilities, if any, do you have with the issues presented?

Answer 1

Yes, under GAAP, a company is allowed to use LIFO Method for inventory estimates. However, under IFRS, the LIFO method is not allowed. The LIFO method does not reflect an accurate flow of inventory in most cases, and thus results in reports of unsually low income levels. Its best to employ the same ,method consistently so your financial statements can be equitably compared from year to year to determine income and profitability.

Valuation under IFRS and GAAP-

under GAAP, inventory is recorded as the lesser of cost or market value. The IFRS lays down slightly different costing rules. It states that inventory is measured as the lesser of cost or net realizable value.

The GAAP version of net realizable value is equal to estimated selling price less any reasonable costs associated with a sale For IFRS, net realiszable value is the best approximation of how much "inventories are expected to realisze"