Level 1 CFA® Exam:
Measurement & Disclosure of Inventory
Note that IFRS and U.S. GAAP differ in this respect of inventory measurement.
According to IFRS, inventories are reported in the balance sheet at the lower of cost and net realizable value (NRV). Following IAS 2.6, the latter can be defined as the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale.
Thus, if the net realizable value turns out to be lower than the carrying amount of inventories in the balance sheet, the value in the balance sheet has to be written down to its net realizable value. By analogy, if the net realizable value is greater than the carrying amount, the value in the balance sheet has to be increased.
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In the table, you can see information about units of a product acquired and sold by Company X in 2022.
| Cost | USD 123 |
| Estimated selling price | USD 134 |
| Estimated costs of sale | USD 18 |
| Replacement cost | USD 90 |
| Normal profit margin | USD 5 |
How much should the carrying amount of a unit the product be both under IFRS and under U.S. GAAP?
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IFRS require that the following be disclosed:
- accounting policy for inventories,
- cost formula applied,
- carrying amount of inventories,
- in the case of manufacturers, carrying amount of different categories of inventory,
- cost of sale,
- amount of any write-downs of inventories,
- amount of any reversals of write-downs, and
- carrying amount of inventories pledged as security for liabilities.
Disclosures required by IFRS and U.S. GAAP are very similar. The only differences relate to:
- reversal of write-downs,
- LIFO method, and
- significant estimates.
Reversal of write-downs is not allowed under U.S. GAAP, so there are no disclosures regarding this issue under U.S. GAAP.
Under U.S. GAAP, there are disclosures related to the LIFO method – namely a company should disclose income from LIFO liquidation. It is not the case under IFRS, because under IFRS the LIFO method is not allowed.
U.S. GAAP also require to disclose any significant estimates related to inventories.
- According to IFRS, inventories are reported in the balance sheet at the lower of cost and net realizable value (NRV).
- Under U.S. GAAP, inventories are carried on the balance sheet at the lower of cost or market.
- Under U.S. GAAP, reversals of write-downs are not allowed.
- Under IFRS reversals of write-downs are allowed.
- Disclosures required by IFRS and U.S. GAAP are very similar. The only differences relate to: reversal of write-downs, LIFO method, and significant estimates.