Analysis of Inventories

Question 1

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How is Inventory Measured in IFRS

Answer 1

The lower of cost or NRV

Question 2

What is NRV

Answer 2

NRV = expected sales price - estimating selling and completion costs

Question 3

What do you do if NRV is less than the balance sheet value of inventory

Answer 3

Inventory is written down to NRV and the loss is recognised in the income statement either by a new line or by increasing COGS (Cost of Goods Sold)

Question 4

What happens if inventory value later recovers

Answer 4

Inventory can be written up, and the gain is recognised in the income stateement as a seperate line item or by reducing the COGS
*Inventory cannot be written up by more than it was written down.

Question 5

How is Inventory Measured in US GAAP

Answer 5

No LIFO/Retail Method: Lower of Cost or NRV

Lifo/Retail Method: The lower of cost or market
(Market = Replacement cost - but cannot be greater than NRV or less than NRV - Normal profit margin. Otherwise NRV or NRV - Normal PRofit Margin

Question 6

Which firms are less likely to recognize Inventory write-downs

Answer 6

LIFO - due to the fact that they are focused on older inventories (probably costing less) - Due to inflation

Question 7

Which Industries and Why can you report inventory above historical cost?

Answer 7

Industry: Commodities and producers of commodities - agricultural, forest, mineral ores and metals
Inventory is reported at NRV, and unrealised gains/losses are recognised in the income statement. - Quoted market price is used to value the inventory