Inventory BROOKS REYNOLDS RUSSELL ENGLAND WAFA HINDIYEH.

InventoryBROOKS REYNOLDS

RUSSELL ENGLAND

WAFA HINDIYEH

GAAP

Codification Topic 330

Tangible personal property of the following:

1. held for sale merchandise, finished goods

2. in the course of production work in process

3. to be consumed in the production raw materials

GAAP

Initial measurement

Inventories are measured at cost when first recognized

Job Order Costing—accumulates and allocates overhead costs separately for each order

Process Costing—accumulates and allocates overhead separately for each stage

GAAP

Cost flow assumptions

One of the following assumptions is made to determine the cost of inventory:

1. First-in First-out (FIFO):

2. Last-in First-out (LIFO):

3. Average method: Weighted average

4. Retail inventory method

5. Specific identification

GAAP

Subsequent measurement

If the market is lower than the cost

-- inventory is measured at the market

-- "Lower of Cost or Market" (LCM)

New GAAP rules for methods other than LIFO and Retail Method: An entity should measure inventory at the lower of cost and net

realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation

GAAP Market under original rules:

1. The market refers to current replacement cost

2. If net realizable value (NRV) is lower than current replacement cost NRV is the market (net realizable value)

3. If current replacement cost is lower than (1) (1) is the market

(1) net realizable value - normal profit margin

Reporting under new rules: Net Realizable Value (NRV)

Lower of cost or NRV

GAAP

GAAP Write-downs

Item by item

Group by group

Total inventory

ASC 420-10-S99-3, Exit or Disposal Cost Obligations – Overall – SEC Materials, states that inventory write-downs should be included in cost of goods sold even when related to an exit or restructuring cost.

ASC 330-10-50-2, Inventory – Overall – Disclosure, states that if “substantial and unusual losses” result from the LCM rule then the loss amount should not be included in cost of goods sold on the income statement.

IFRS – IAS 2

Cost included in Inventory Cost

Inventory Cost includes Production Costs, Conversion Costs, and Purchase Costs.

Cost of Freight-In is to be included in Inventory Cost.

Interest on Inventory must generally be capitalized, although certain conditions must be met.

IFRS – IAS 2

Allowed Inventory Costing Method:

Company has ability to choose between FIFO and Average Costing Methods.

LIFO Method is not allowed under IFRS.

The same cost flow assumptions must be used for inventory with a similar nature and use even if inventory is held in different geographic locations.

IFRS – IAS 2

Reports at the lower of cost or net realizable value (LCNRV):

► Net Realizable Value (NRV) is defined as the estimated selling price less the estimated costs of completion and sale.

► Since replacement cost would typically be less than NRV, IFRS will generally result in lower write-downs than US GAAP.

IFRS – IAS 2

Inventory Write-downs:

Write-downs are typically done on an Item-by-Item basis

Group-by-Group basis is allowed under certain circumstances.

Write-downs and reversals of write-downs must be included as expenses.

IFRS – IAS 2

Disclosures:

Requires disclosures on the basis upon which amounts are stated (LCNRV) and costing method.

Requires disclosures on Inventory Financing Arrangements.

Requires disclosures of both the amount of write-downs recognized as expense and any reversal of write-downs.

Comparison to US GAAP

IFRS

► The same cost flow assumptions must be used for inventory with a similar nature and use even if inventory is held in different geographic locations and/or by different entities.

► LIFO method is not allowed.

US GAAP

► Different cost flow assumptions (FIFO, LIFO, weighted average) may be used for inventory with a similar nature and use.

► LIFO method is allowed.

Lower of Cost or Market

US GAAP

For LIFO & Retail inventory method Reports at the LCM:

Market is defined as replacement cost with a floor (NRV less normal profit margin) and a ceiling (NRV).

NRV is defined as the estimated selling price less the estimated costs of completion and sale.

New rules for all other methods: Reports at the lower of cost and NRV Net realizable value is the estimated

selling prices, less reasonably predictable costs of completion, disposal, and transportation

Reversals of prior write-downs are not allowed.

IFRS

► Reports at the lower of cost or net realizable value (LCNRV):► NRV is defined as the estimated

selling price less the estimated costs of completion and sale.

► Since replacement cost would typically be less than NRV, IFRS will generally result in lower write-downs than US GAAP.

► Reversals of prior write-downs can be made and recognized in income.

Inventory Write-down Example Example 1 – inventory write-down

Part 1:On December 31, 2012, Jets International had an inventory of five different types of airplane parts. Given the current fuel costs, airplane parts are not as valuable as they once were. The chart on the next slide provides the cost basis, net realizable value, replacement cost and net realizable value less normal profit margin as of December 31, 2012. Jets International prepares its inventory valuation comparisons on an item-by-item basis.

What is the amount of write-down (if any) required using US GAAP? Please provide the necessary journal entry.

What is the amount of write-down (if any) required using IFRS? Please provide the necessary journal entry.

Cost NRV RC NRV-NPM

Part 1$

10,000

$

20,000

$

15,000

$12,000

Part 2$

20,000

$

19,000

$

18,000

$17,000

Part 3$

5,000

$

3,000

$

4,000

$2,000

Part 4$

8,000

$

15,000

$

12,000

$11,000

Part 5$

15,000

$

12,000

$

9,000

$11,000

Inventory Write-down Example

Part 1 (continued):

Original cost NRV RC

NRV-NPM

US GAAPmarket

US GAAPLCM

IFRS and

GAAP LCNRV

Part 1 $10,000 $20,000 $15,000 $12,000 $15,000 $10,000 $10,000

Part 2 20,000 19,000 18,000 17,000 18,000 18,000 19,000

Part 3 5,000 3,000 4,000 2,000 3,000 3,000 3,000

Part 4 8,000 15,000 12,000 11,000 12,000 8,000 8,000

Part 5 15,000 12,000 9,000 11,000 11,000 11,000 12,000

Total $58,000 $50,000 $52,000

Example 1:

Part 1 solution:

Inventory Write-down Example

Part 1 solution (continued):US GAAP: IFRS and new US GAAP:

Original cost 58,000 Original cost $58,000LCM 50,000 LCNRV 52,000Write-down $ 8,000 Write-down $6,000

US GAAP journal entry: IFRS journal entry:

COGS $8,000 Inventory write-down expense $6,000 Inventory $8,000 Inventory valuation allowance $6,000

GAAP Journal entry:Loss on Write-down $6,000 Inventory $6,000

New GAAP: When evidence exists that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs.

The amount of inventory write down in this example is $8,000 using US GAAP because the LCM is less than the original cost. The amount is to be recorded in the income statement to COGS and directly to inventory because a future reversal of write-downs is not permitted. Using IFRS, the write-down is $6,000 because the LCNRV is less than the original cost. The write-down is not required to be recorded in a specific income statement account. A valuation allowance is used because future reversals of write-downs are permitted.

Inventory Write-down Example

Inventory Write-down Reversal Example

Example 1 – write-down reversal

Part 2:The airline industry’s business was so terrible during 2013 that Jets International still had the same five parts in its inventory as of December 31, 2013. However, fuel prices have decreased, so the outlook is more optimistic. As of the end of the year, Jets International’s original cost basis, net realizable value, replacement cost and net realizable value less the normal profit are as shown on the next slide.

► What is the amount of write-down reversal (if any) required using US GAAP? Please provide the necessary journal entry.

► What is the amount of write-down reversal (if any) required using IFRS? Please provide the necessary journal entry.

Inventory Write-down Reversal Example

Original Cost NRV RC NRV-NPM

Part 1 $10,000

$

21,000

$

16,000

$

13,000

Part 2 $20,000

$

20,000

$

19,000

$

18,000

Part 3 $5,000

$

4,000

$

9,000

$

3,000

Part 4 $8,000

$

16,000

$

11,000

$

12,000

Part 5 $15,000

$

14,000

$

10,000

$

12,000

Part 2 (continued):

Example 1:

Part 2 solution:

Inventory Write-down Reversal Example

Original Cost

IFRS LCNRV December 31,

2012 NRV

IFRS LCNRV December 31,

2013

Part 1$

10,000$10,000

$21,000 $10,000

Part 2

20,000 19,000 20,000 20,000

Part 3

5,000 3,000 4,000 4,000

Part 4

8,000 8,000 16,000 8,000

Part 5

15,000 12,000 14,000 14,000

Total$

58,000

$52,000 $56,000

Inventory Write-down Reversal Example

Part 2 solution (continued):No reversal of a write-down is permitted using US GAAP.

IFRS:December 31, 2013 LCNRV $ 56,000December 31, 2012 LCNRV 52,000Write-down $ 4,000

Journal entry:

Inventory valuation allowance $4,000Inventory write-down expense $4,000

Since the LCNRV at December 31, 2013 exceeds the LCNRV at December 31, 2012 by $4,000, this amount is recorded as a reversal to the previous write-down. The reversal cannot be more than the original write-down.

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