F describe the measurement of inventory at the lower of cost and net realisable value; Flashcards
describe the measurement of inventory at the lower of cost and net realisable value; Measurement of inventory value (due to financial risk from holding inventory - spoilage, obsolescence, drop in selling price)
Measuring Inventories under IFRS
“IFRS, “inventories shall be measured at lower of cost AND net realisable value.””
Event: The value of inventory (NRV) declines below the CV on the BS
Write down the Inv Carrying Amount to its NRV on BS and Expense the loss (reduction in value) on the IS
Carry Amount —> NRV on BS
Net Realisable Value (it is assessed each subsequent period)
“The estimated selling price in the ordinary course of business less the estimated costs necessary to get the inventory in condition for sale and to make the sale.”
Est. Selling Price - Costs nec. to get Inv in condition for sale
NRV of Inventory Previously Written Down (Aka, ‘Reversal’)
‘Reversal’ is limited to the amount of the original write down and recognised as a reduction in cost of sales (a reduction in the amount of inventories recognised as an expense)
(“selling price less reasonably estimated costs of completion and disposal”)
“fair value less costs to sell and, if necessary, complete”
US GAAP Inventories Valuation (btw…reversals are NOT allowed)
“U.S. GAAP, inventory is measured at lower of cost OR market value”
‘Market Value’ - Market value is defined as current replacement cost subject to upper and lower limits.
Market Value Upper Limit - NRV (“selling price less reasonably estimated costs of completion and disposal”)
Market Value Lower Limit: “net realisable value less a normal profit margin”
Write-downs reduce the value of inventory
The loss in value of inventory is an IS expense against COGS
Agriculture and Forest Products
“Changes in the value of inventory (increases or decreases) are recognised in profit or loss in the period of the change. U.S. GAAP are similar to IFRS in the treatment of inventories of agricultural and forest products and mineral ores. Mark-to-market inventory accounting is allowed for refined bullion of precious metals.”
Measure INV at NRV… for the G or L…which is reflected in COGS on IS
EI > NRV, Inc. Carry Amount Inv on BS, reduce Cost of Sales on IS
Write Inventory down (write down: EI>NRV) as NRV on BS
Record the change in value of inv (EI - NRV) = reduction, aka expense
Inc. the carrying amount of Inv. and reduce the Cost of Sales
US GAAP Write-Down (Inv. Vals = lower of cost or market value (Current replacement cost subject to upper limit: NRV = selling price - est. costs of completion, disposal. OR current replacement cost subject to lower limit: NRV - Normal Profit Margin)
Under GAAP, Lower of Cost could be the ‘current replacement cost’
Write inventory down to ‘Lower of Cost’ or ‘market value’
Include change in value (NRV relative to Carrying Amount) in COGS on IS
