1. 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

2. 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.

3. 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
( )
Standard applies to all inventories except:
Work in progress arising under construction contracts
Financial instruments
Biological assets

4. Costs Included in Inventory
US GAAP
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

5. Costing Methods (Cost Flow Assumptions)
US GAAP –
IFRS - IAS 2
LIFO (last-in, first-out), FIFO (first-in, first-out), Weighted Average, and sometimes Specific Identification. ( )
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.

6. Measurement of Inventories
US GAAP
IFRS – IAS 2
Inventory carried out at lower of cost or market (LOCOM). ( )
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

7. Required Disclosures:
US GAAP –
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

8. 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

9. 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).

10. 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

11. 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

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

13. 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.

14. Sources