1. Inventory

2. Typical coverage of US GAAP
Definition and scope
Perpetual vs. periodic systems
Physical goods and costs included in inventory
Effects of inventory errors
Cost flow assumptions
Specific identification
Average cost methods
First-in, first-out method (FIFO)
Last-in, first-out method (LIFO) (including dollar-value LIFO)
Retail inventory method (RIM)
Lower of cost or market
Disclosures

3. Executive summary
IFRS does not permit the LIFO method of costing inventory, unlike US GAAP.
IFRS reports inventory at the lower of cost or net realizable value (LCNRV).  US GAAP reports inventory at the lower of cost or market (LCM), where market is defined as a replacement cost with a floor (NRV less normal profit margin) and a ceiling (NRV).
IFRS allows reversals of prior inventory write-downs to be made and recognized in income, unlike US GAAP.

4. Primary pronouncements
US GAAP
ASC 330, Inventory
IFRS
IAS 2, Inventories

5. Progress on convergence
On July 15, 2014, the FASB issued an ED Inventory (Topic 330): Simplifying the Measurement of Inventory.
Comments are due September 30, 2014.
Inventory would be reported at LCNRV, the same as the IFRS approach.
The proposed effective date is for annual periods beginning after December 15, 2015, with early adoption permitted.

6. Definition and scope US GAAP IFRS
Inventory includes finished goods, work-in-progress and raw materials.
Similar
Inventory is recognized when the risk and rewards pass to entity.
Similar

7. Definition and scope US GAAP
Intangible assets produced for resale (e.g., software) are not included in inventory.
ASC 908, Agriculture, is used to scope out agricultural products and commodities.
IFRS
Intangible assets produced for resale are included in inventory.
IAS 41, Agriculture, is used to scope out agricultural products and commodities.

8. Perpetual vs. periodic systems
US GAAP
IFRS
Both systems are allowed.
Similar

9. Physical goods and costs included in inventory
US GAAP
IFRS
Costs include productions costs, conversion costs and purchase costs.
Similar
Cost includes freight-in.
Similar
Interest must generally be capitalized.
Similar, although certain conditions must be met.

10. Physical goods and costs included in inventory
US GAAP
No guidance is provided on storage costs.
IFRS
Storage costs are usually expensed.

11. Cost flow assumptions US GAAP IFRS
Specific identification, average cost, FIFO and RIM are allowed.
Similar

12. Cost flow assumptions US GAAP IFRS
Different cost flow assumptions may be used for inventory with a similar nature and use.
LIFO method is allowed:
The IRS has a conformity rule that requires LIFO to be used for book purposes if it is used for tax purposes.
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:
This is significant to some companies because of taxation implications. If IFRS is adopted with no changes made in the current standards and the current tax laws, then companies will have to pull the LIFO reserve back into their taxable income over a four-year period.

13. Cost flow assumptions Analysis of companies as of 2011:
Exxon had a reserve of $25.6 billion in 2011 and $21.3 billion in In 2011, this was 47% of Exxon’s operating income, 62% of its net income and 8% of its assets.
Central Steel & Wire Co. had a reserve balance that was 11 times its operating income and 16 times its net income in 2011.
Variable
Mean
Median
Reserve balance (in millions)
$363
$45
Net income (in millions)
$893
$109
LIFO reserve/operating income
50%
17%
LIFO reserve/net income
60%
27%
LIFO reserve/assets 4% 2%
LIFO reserve/inventory*
14%
*Inventory is the LIFO inventory with the reserve added back.
Analysis of companies as of 2011 using Compustat: 6,432 companies in the sample of which 4,384 companies had inventory of which 291 companies had a LIFO reserve.

14. Lower of cost or market US GAAP IFRS
Write-downs of inventories are required in certain circumstances.
Similar, but specifics vary.

15. Lower of cost or market US GAAP 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.
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.

16. Lower of cost or market US GAAP
Write-down can be done using an item-by-item, group-by-group or on a total inventory basis.
IFRS
Write-downs are typically done on an item-by-item basis:
Group-by-group basis is allowed under certain circumstances.
Since most companies in the US use an item-by-item basis, significant differences are not expected.

17. Lower of cost or market US GAAP
Write-downs must be included as expense:
ASC 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 , 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
Write downs and reversals of write-downs must be included as expense, but a particular expense account is not specified.

18. 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.
What is the amount of write-down (if any) required using US GAAP on both a total and item-by-item basis? Please provide the necessary journal entry.
What is the amount of write-down (if any) required using IFRS on both a total and item-by-item basis? Please provide the necessary journal entries.

19. Inventory write-down example
Part 1 (continued):
Cost
NRV RC
NRV-NPM
Part 1
$ 10,000
$ 20,000
$ 15,000
$ 12,000
Part 2
$ 19,000
$ 18,000
$ 17,000
Part 3
$ 5,000
$ 3,000
$ 4,000
$ 2,000
Part 4
$ 8,000
$ 11,000
Part 5
$ 9,000

20. Inventory write-down example
Example 1: Part 1 solution:
Original cost
NRV RC
NRV- NPM
US GAAP
market
LCM
IFRS LCNRV
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
9,000
Item-by-item basis
$58,000
$50,000
$52,000
Total basis
$69,000
$53,000
Total basis for US GAAP: If the inventory write-down is calculated for the total inventory, there is no write-down under US GAAP as the LCM value is $58,000 the same as the original cost.

21. Inventory write-down example
Part 1 solution (continued):
Item-by-item basis:
US GAAP: IFRS:
Original cost $ 58,000 Original cost $ 58,000
LCM 50,000 LCNRV 52,000
Write-down $ 8,000 Write-down $ 6,000
US GAAP journal entry: IFRS journal entry:
CGS $8,000 Inventory write-down expense $6,000
Inventory $8,000 Inventory valuation allowance $6,000
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 CGS 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.

22. 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, 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.

23. Inventory write-down reversal example
Part 2 (continued):
Original Cost
NRV RC
NRV-NPM
Part 1
$ 10,000
$ 21,000
$ 16,000
$ 13,000
Part 2
$ 20,000
$ 19,000
$ 18,000
Part 3
$ 5,000
$ 4,000
$ 9,000
$ 3,000
Part 4
$ 8,000
$ 11,000
$ 12,000
Part 5
$ 15,000
$ 14,000

24. Inventory write-down reversal example
Part 2 solution:
Original Cost
IFRS LCNRV December 31, 2012
NRV
IFRS LCNRV December 31, 2013
Part 1
$ 10,000
$10,000
$21,000
Part 2
20,000
19,000
Part 3
5,000
3,000
4,000
Part 4
8,000
16,000
Part 5
15,000
12,000
14,000
Total
$ 58,000
$ 52,000
$56,000

25. 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 $ 56,000
December 31, 2012 LCNRV 52,000
Write-down $ 4,000
Journal entry:
Inventory valuation allowance $4,000
Inventory 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.

26. Disclosures US GAAP IFRS
Basis upon which amounts are stated (e.g., LCM) and costing method
Similar
Carrying amounts by classification
Similar
Inventory financing arrangements
Similar

27. Disclosures
US GAAP
Requires disclosure of the amount of write-downs recognized as expense.
Various required disclosures when a firm uses the LIFO costing method (e.g., the LIFO reserve or replacement cost must be disclosed).
IFRS
Requires disclosure of both the amount of write-downs recognized as expense and any reversal of write-downs.
No required disclosures related to LIFO method since LIFO is not allowed.

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