Inventories- US Generally Accepted Accounting Principles (GAAP) vs Inventories- US Generally Accepted Accounting Principles (GAAP) vs. International Financial Reporting Standards (IFRS) Julia Makarieva Jennifer Waclawik Becky Fay Grayson Schrantz Alex Perez

Definition of Inventory US GAAP- considered more rules based IFRS- considered more principle based The aggregate of those items of tangible personal property that are: Held for sale in the ordinary course of business In the process of production for such sale To be currently consumed in the production of goods or services to be available for sale. Assets that are: In the process of production for such sale In the form of materials or supplies to be consumed in the production process or in the rendering of goods or services.

IFRS- According to International Accounting Standard 2 Applies to: US GAAP IFRS- According to International Accounting Standard 2 Applies to all inventories except: Intangible assets produced for resale Long-term assets subject to depreciation Goods which will be classified as long-term assets subject to depreciation when put into use (330-10-20) Standard applies to all inventories except: Work in progress arising under construction contracts Financial instruments Biological assets

Costs Included in Inventory US GAAP - 330-10 IFRS – IAS 2.10 Production costs, conversion costs, purchase costs and freight in costs are included Interest must be capitalized Production costs, conversion costs, purchase costs and freight in costs and other costs directly attributable to the acquisition of finished goods, materials and services are included. Storage costs are usually expensed

Costing Methods (Cost Flow Assumptions) US GAAP – 330-10 IFRS - IAS 2 LIFO (last-in, first-out), FIFO (first-in, first-out), Weighted Average, and sometimes Specific Identification. (330-9-30) Based off of periodic income Standard cost and retail methods are used Uniform within industries LIFO is prohibited (IAS 2.25) Ending Inventory, Cost of Goods Sold, Tax, and Net Income Inventories similar in nature or use, to the entity, must have the same cost formula.

Measurement of Inventories US GAAP - 330-10 IFRS – IAS 2 Inventory carried out at lower of cost or market (LOCOM). (330-8-35) Write-downs of inventories are required Reversal of prior write-downs are not allowed Write-downs can be done on an item-by-item, group-by-group, or total inventory basis Write-downs must be included as an expense Inventory carried out at lower of cost and net realizable value. (IAS 2.9) Reversal of prior write-downs are allowed Write-downs are done on an item-by-item basis Write-downs and reversal of write-downs must be included as an expense

Required Disclosures: US GAAP – 330-10 IFRS – IAS 2 Accounting policies adapted for measurement of inventories Inventory financing arrangements Carrying amounts by classification Amount of write-downs recognized as expense Losses from application of lower of cost or market Goods stated above cost Stating inventories at sales prices Losses on firm purchase commitments Significant estimates Accounting policies adapted in measurement of inventories Total carrying amount of inventories Carrying amount of inventories carried at fair value less costs to sell Inventory that is recognized as an expense in the period Amount of any write-downs of inventories recognized as an expense in the period Amount of reversals of any write-down that in the period and the circumstance that led to it Carrying amount of inventories pledged as security for liabilities

Advantages and Disadvantages US GAAP IFRS Advantages clarity in application reduction of risk comparability for companies in the same industry for the same rule allowing preparers the ability to consider the best way to account for and report a transaction increased comparability among companies with similar transactions Disadvantages All transaction must be accounted for in accordance with the rule- can provide misleading information Harder to compare different industries Rules do not always provide fair representation Used only in the United States Easier to manipulate transactional accounting increased variations in accounting approaches for similar transactions

Potential Problems with Adopting IFRS Problems Consist of the death of LIFO (Last In First Out) for the companies that used it for their inventory. LIFO is widely used in the U.S, so that would cause a change for majority of companies here. Affects their financial reporting. Affects their taxation (required to change their taxing methods).

Potential Problems with Adopting IFRS Purpose of LIFO is to lower their income tax liability and to postpone paying taxes. This would also reduce income for financial reporting purposes. Using LIFO would cause a reduction in the taxable income. Due to IFRS not allowing LIFO it would cause a switch to FIFO or Average Cost which would: Increase inventory Increase the current income taxes

Audit Problems with IFRS Where is the line drawn? Consistency of Measurement Reversal transactions Allows multiple methods if identical Consistency is key!! Net realizable value

Audit Problems with GAAP Obsolete inventory Potential solution Bill and Hold scam Good auditing

Which is Better? The IFRS inventory valuation is a fairer valuation because it is not solely based on rules, but principles as well. It also provides increased comparability.

Sources http://ifrsusa.wordpress.com/2011/04/05/which-is-better-%E2%80%93-principles-or-rules/ http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias2_en.pdf www.csb.uncw.edu/people/rocknessj/classes/.../InventoryIFRS.ppt‎ http://www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November_2012/$FILE/US_GAAP_v_IFRS_The_Basics_Nov2012.pdf http://cpaclass.com/gaap-accounting-standards/codification-300/asc-codification-topic-330.htm https://checkpoint.riag.com/app/view/previewDocNew?feature=tcheckpoint&lastCpReqId=4700635&preview=y&linkid=162&linkType=tlltype&DocID=iGAAPCD13%3A4822.1&pinpnt=cite&linkHght=destguid%3AiGAAPCD13%3A4882.1&SrcDocId=T0GAAPCD13%3A4882.1-1 http://www.journalofaccountancy.com/Issues/1999/Oct/carmichl.htm http://www.accountingtools.com/obsolete-inventory-accounting http://www.thefreelibrary.com/Inventory+valuation+under+IFRS+and+GAAP%3A+this+article+is+based+on+a...-a0284451759