25.4: Inventory Valuation

Question 1

How is inventory reported under IFRS on the balance sheet?

Answer 1

At the lower of cost or NRV, where NRV is expected sales price minus selling costs and completion costs.

If NRV < carrying value, inventory = NRV and loss is recorded on the I/S. If there is a subsequent recovery in value (remember, only IFRS allows recoveries), the inventory can be written up and the gain is recognized in the I/S by reducing COGS by the amount of the recovery.

Note that inventory cannot be written up by more than it was previously written down.

Question 2

How is inventory reported under GAAP on the balance sheet?

Answer 2

Under GAAP, if inventory cost method other than LIFO or the retail method is used, inventory is recorded at the lower of cost of NRV (same as IFRS)

If companies use LIFO or the retail method, inventory is reported at the lower of cost or market:

• if replacement cost is less than NRV minus a normal profit margin, then market is NRV minus a normal profit margin
• if replacement cost is greater than NRV, then market is NRV
• if cost exceeds market, inventory is written down to market and

Question 3

How is inventory reported for commodity-like products?

Answer 3

Under both IFRS and GAAP, inventory for commodity-like products are reported at NRV and any unrealized gains and losses from changing market prices are recognized in the I/S.

If an active market exists for the commodity, the quoted market price issued to value the inventory. Otherwise, recent market transactions are used.

Question 4

What are the 8 required inventory disclosures under IFRS and GAAP?

Answer 4

1. The cost flow method used
2. Total carrying value of the inventory, with carrying value by classification if appropriate
3. Carrying value of inventories reported at fair value minus selling costs
4. The cost of inventory recognized as an expense (COGS) during the period
5. Amount of inventory write-downs during the period
6. Reversals of inventory write-downs during the period, including a discussion of the circumstances of reversal (IFRS only)
7. Carrying value of inventories pledged as collateral

Question 5

What happens when a firm changes its inventory cost flow method? What is required under IFRS vs GAAP?

Answer 5

When a firm changes inventory cost flow methods, the change is made retrospectively where the prior year’s financial statements are recast based on the new cost flow method.

The cumulative effect of the change is reported as an adjustment to the beginning retained earnings of the earliest year presented.

Under IFRS, the firm must demonstrate that the change will provide reliable and more relevant information. Under GAAP, the firm must explain why the change in cost flow method is preferable.

Question 6

What is the exception to retrospective application when a firm changes its inventory cost flow method?

Answer 6

The exception is when a firm changes to LIFO from another cost flow method. In this case, the change is applied prospectively. The carrying value of inventory under the old method becomes the first layer of inventory under LIFO in the period of the change.