Question

A) .US GAAP is more concerned with inventories’ balance sheet presentation because it instructs users what accounts to use for certain transactions such as inventory write downs

B) The IFRS requirement to reverse prior inventory write downs is the IFRS stating that inventory should be reported at market value just like other assets on the balance sheet. The IFRS is more focused on comparability across markets as opposed to US GAAP which is concerned with fraud which might occur with this standard. IFRS requires the market value of inventory to maintain comparability and the true financial position of ths company’s inventory.

C.) Yes. Companies should be allowed to reverse inventory write downs in periods after the initial write down in order to better reflect value of their inventory. US GAAP is concerned with companies using this flexibility to increase or decrease income on a period to period basis, however, if US GAAP limited the number of times inventory could be adjusted it would limit the effects. Reversing write downs would give financial statement users a better understanding of the company’s inventory if used properly

What is good response to this discussion?

Answer 1

Solution :

US GAAP : Inventory must be written down to market (recorded at lower of cost or market (LCM)) subsequent to acquisiton if its utility is no longer as great as its cost. The difference should be recognised as a loss of the current period. Non temporary market declines are recognized in the interim periods when they occur. Recoveries of these losses on the same inventory later in the fiscal year are recognised as gains (but only to the extent of the previously recognized losses). If the market declines can reasonably be expected to be restored by year end , they are not recogized.

IFRS : Inventories are measured at lower of cost or net realisable value (NRV) . NRV is assessed at each period. Accordingly , a write down may be reversed but not above original cost. THe write off and reversal are recognised in proft and loss. For an interim period , an inventory loss from the market decline must be recognized even if no loss is reasonably expected for the year.

Hence with reference to the above,

Statment A,B and C : Is correct. US GAAP is more specific on presentation while IFRS is general in nature.