Kế toán tài chính - Inventories: Additional valuation issues

PREVIEW OF CHAPTER 9Intermediate Accounting16th EditionKieso ● Weygandt ● Warfield Understand and apply the lower-of-cost-or-net realizable value rule.Understand and apply the lower-of-cost-or-market rule.Understand other inventory valuation issues.LEARNING OBJECTIVESDetermine ending inventory by applying the gross profit method.Determine ending inventory by applying the retail inventory method.Explain how to report and analyze inventory.After studying this chapter, you should be able to:Inventories: Additional Valuation Issues9LO 1Net realizable value (NRV) is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.A company abandons the historical cost principle when the future utility (revenue-producing ability) of the asset drops below its original cost.LOWER-OF-COST-OR-NET REALIZABLE VALUE LO 1Definition of Net Realizable Value Illustration: Assume that Mander Corp. has unfinished inventory with a cost of $950, a sales value of $1,000, estimated cost of completion of $50, and estimated selling costs of $200. Mander’s net realizable value is computed as follows.Definition of Net Realizable Value LO 1ILLUSTRATION 9-1 Computation of Net Realizable ValueMander reports inventory on its balance sheet at $750. In its income statement, Mander reports a Loss Due to Decline of Inventory to NRV of $200 ($950 − $750). LO 1Definition of Net Realizable Value ILLUSTRATION 9-1 ILLUSTRATION 9-2 LCNRV Disclosures Regner Foods computes its inventory at LCNRV, as shown in Illustration 9-3 (amounts in thousands).LO 1Illustration of LCNRVILLUSTRATION 9-3Determining Final Inventory ValueLO 1Methods of Applying LCNRVILLUSTRATION 9-4Alternative Applications of LCNRVCompanies usually price inventory on an item-by-item basis. LO 1Ending inventory (cost) $ 82,000 Ending inventory (at NRV) 70,000Adjustment to LCNRV $ 12,000Inventory 12,000Loss Due to Decline in Inventory 12,000Inventory 12,000Cost of Goods Sold 12,000Loss MethodCOGSMethodRecording NRV Instead of Cost The following inventory data is for Ricardo Company. ILLUSTRATION 9-7Presentation of Inventory Using an Allowance AccountInstead of crediting the Inventory account for market adjustments, companies generally use an allowance account, often referred to as Allowance to Reduce Inventory to NRV. Using an allowance account under the loss method, Ricardo Company makes the following entry to record the inventory write-down to NRV. Use of an AllowanceLoss Due to Decline of Inventory to NRV 12,000 Allowance to Reduce Inventory to NRV 12,000LO 1Balance SheetRecording NRV Instead of Cost LO 1Income StatementRecording NRV Instead of Cost ILLUSTRATION 9-8Effect on Net Income of Reducing Inventory to NRVIn general, accountants adjust the allowance account balance at the next year-end to agree with the discrepancy between cost and the LCNRV at that balance sheet date.Use of an Allowance—Multiple PeriodsUnderstand and apply the lower-of-cost-or-net realizable value rule.Understand and apply the lower-of-cost-or-market rule.Understand other inventory valuation issues.LEARNING OBJECTIVESDetermine ending inventory by applying the gross profit method.Determine ending inventory by applying the retail inventory method.Explain how to report and analyze inventory.After studying this chapter, you should be able to:Inventories: Additional Valuation Issues9LO 2The use of the lower-of-cost-or-net realizable value method works well to measure the decline in value of a company’s inventory for most companies.The FASB decided to grant an exception to the LCNRV approach for companies that use the LIFO or retail inventory methods. Rather than comparing cost to net realizable value, under the alternative approach, companies compare a “designated market value” of the inventory to cost. The approach is commonly referred to as lower-of-cost-or-market (LCM). LOWER-OF-COST-OR-MARKETLO 2This approach begins with replacement cost, then applies two additional limitations to value ending inventory.Net realizable value (ceiling) andnet realizable value less a normal profit margin (floor).LOWER-OF-COST-OR-MARKETNet realizable value (NRV) is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal.A company values inventory at the lower-of-cost-or-market, with market limited to an amount that is not more than net realizable value or less than net realizable value less a normal profit margin.LO 2Illustration: Assume that Parker Corp. has unfinished inventory with a sales value of $1,000, estimated cost of completion and disposal of $300, and a normal profit margin of 10 percent of sales. Parker determines the following net realizable value.LOWER-OF-COST-OR-MARKETILLUSTRATION 9-9Computation of Net Realizable ValueLO 2NotLOWER-OF-COST-OR-MARKETILLUSTRATION 9-10Inventory Valuation— Lower-of-Cost-or-MarketLO 2Ceiling – prevents overstatement of the value of obsolete, damaged, or shopworn inventories.Floor – deters understatement of inventory and overstatement of the loss in the current period.What is the rationale for the Ceiling and Floor limitations?LOWER-OF-COST-OR-MARKETLO 2How Lower-of-Cost-or-Market WorksRegner makes the following entry (using the loss method) to record the decline in value.Loss Due to Decline of Inventory to Market 65,000 Allowance to Reduce Inventory to Market 65,000$65,000ILLUSTRATION 9-12Determining Final Inventory ValueLO 2Methods of Applying Lower-of-Cost-or-MarketILLUSTRATION 9-13Alternative Applications of Lower-of-Cost-or-MarketLO 2The lower-of-cost-or-net-realizable value (market) rule is designed to provide timely information about the decline in the value of inventory. When the value of inventory declines, income takes a hit in the period of the write-down. What happens in the periods after the write-down? For some companies, gross margins and bottom lines get a boost when they sell inventory that had been written down in a previous period. For example, as the table below shows, Vishay Intertechnology, Transwitch, and Cisco Systems reported gains from selling inventory that had previously been written down. The table also evaluates how clearly these companies disclosed the effects of the reversal of inventory write-downs. For Transwitch, the reversal of fortunes amounted to 23 percent of net income. The problem is that the $600,000 credit had little to do with the company’s ongoing operations, and the company did not do a good job disclosing the effect of the reversal on current-year profitability. Even when companies do disclose a reversal, it is sometimes hard to determine the impact on income. For example, Intel disclosed that it had sold inventory that had been written down in prior periods but did not specify how much reserved inventory was sold. Transparency of financial reporting should be a top priority. WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? “PUT IT IN REVERSE”(continued)LO 2LO 2With better disclosure of the reversals that boost profits in the current period, financial transparency would also get a boost.WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? “PUT IT IN REVERSE”CompanyGain from ReversalDisclosureVishay IntertechnologyTranswitchCisco SystemsNot available$600,000$525 millionPoor—The semiconductor company did not mention the gain in its earnings announcement. Two weeks later in an SEC filing, Vishay disclosed the gain on the inventory that it had written down. Poor—The company did not mention the gain in its earnings announcement. Three weeks later in an SEC filing, the company disclosed the gain on the inventory that it had written down. Good—The networking giant detailed in its earnings release and in SEC filings the gains from selling inventory it had previously written off.Source: S. E. Ante, “The Secret Behind Those Profit Jumps,” BusinessWeek Online (December 8, 2003).Conceptual deficiencies:Expense recorded when loss in utility occurs. Profit on sale recognized at the point of sale.Inventory valued at cost in one year and at market in the next year.Net income in year of loss is lower. Net income in subsequent period may be higher than normal if expected reductions in sales price do not materialize.Application of these rules uses a “normal profit” in determining inventory values, which is a subjective measure. Evaluation of LCNRV and Lower-of-Cost-or-Market RuleLOWER-OF-COST-OR-MARKETLO 2Understand and apply the lower-of-cost-or-net realizable value rule.Understand and apply the lower-of-cost-or-market rule.Understand other inventory valuation issues.LEARNING OBJECTIVESDetermine ending inventory by applying the gross profit method.Determine ending inventory by applying the retail inventory method.Explain how to report and analyze inventory.After studying this chapter, you should be able to:Inventories: Additional Valuation Issues9LO 3a controlled market with a quoted price applicable to all quantities, and no significant costs of disposal ortoo difficult to obtain cost figures.Permitted by GAAP under the following conditions:OTHER VALUATION APPOACHES Valuation at Net Realizable ValueLO 3Used when buying varying units in a single lump-sum purchase.Valuation Using Relative Sales ValueIllustration: Woodland Developers purchases land for $1 million that it will subdivide into 400 lots. These lots are of different sizes and shapes but can be roughly sorted into three groups graded A, B, and C. As Woodland sells the lots, it apportions the purchase cost of $1 million among the lots sold and the lots remaining on hand. Calculate the cost of lots sold and gross profit.OTHER VALUATION APPOACHES LO 3ILLUSTRATION 9-14Allocation of Costs, Using Relative Sales ValueILLUSTRATION 9-15Determination of Gross Profit, Using Relative Sales ValueOTHER VALUATION APPOACHES LO 3Generally seller retains title to the merchandise.Buyer recognizes no asset or liability. If material, the buyer should disclose contract details in note in the financial statements.If the contract price is greater than the market price, and the buyer expects that losses will occur when the purchase is effected, the buyer should recognize losses in the period during which such declines in market prices take place.Purchase Commitments—A Special ProblemOTHER VALUATION APPOACHES LO 3Illustration: St. Regis Paper Co. signed timber-cutting contracts to be executed in 2018 at a price of $10,000,000. Assume further that the market price of the timber cutting rights on December 31, 2017, dropped to $7,000,000. St. Regis would make the following entry on December 31, 2017.Unrealized Holding Gain or Loss—Income 3,000,000 Estimated Liability on Purchase Commitment 3,000,000Other expenses and losses in the Income statement.Current liabilities on the balance sheet.OTHER VALUATION APPOACHES LO 3Purchases (Inventory) 7,000,000Est. Liability on Purchase Commitment 3,000,000 Cash 10,000,000Assume the Congress permitted St. Regis to reduce its contract price and therefore its commitment by $1,000,000. Est. Liability on Purchase Commitment 1,000,000 Unrealized Holding Gain or Loss—Income 1,000,000Illustration: When St. Regis cuts the timber at a cost of $10 million, it would make the following entry.OTHER VALUATION APPOACHES LO 3Understand and apply the lower-of-cost-or-net realizable value rule.Understand and apply the lower-of-cost-or-market rule.Understand other inventory valuation issues.LEARNING OBJECTIVESDetermine ending inventory by applying the gross profit method.Determine ending inventory by applying the retail inventory method.Explain how to report and analyze inventory.After studying this chapter, you should be able to:Inventories: Additional Valuation Issues9LO 4Substitute Measure to Approximate InventoryBeginning inventory plus purchases equal total goods to be accounted for.Goods not sold must be on hand.The sales, reduced to cost, deducted from the sum of the opening inventory plus purchases, equal ending inventory.GROSS PROFIT METHOD OF ESTIMATING INVENTORYLO 4GROSS PROFIT METHODIllustration: Cetus Corp. has a beginning inventory of $60,000 and purchases of $200,000, both at cost. Sales at selling price amount to $280,000. The gross profit on selling price is 30 percent. Cetus applies the gross margin method as follows.ILLUSTRATION 9-17Application of Gross Profit MethodLO 4Illustration: In Illustration 9-17, the gross profit was a given. But how did Cetus derive that figure? To see how to compute a gross profit percentage, assume that an article cost $15 and sells for $20, a gross profit of $5.Computation of Gross Profit PercentageGROSS PROFIT METHODILLUSTRATION 9-18Computation of Gross Profit PercentageLO 4ILLUSTRATION 9-19 Formulas Relating to Gross ProfitILLUSTRATION 9-20Application of Gross Profit FormulasGROSS PROFIT METHODLO 4Illustration: Astaire Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May.Instructions:(a) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of sales.(b) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of cost.GROSS PROFIT METHODLO 4(a) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of sales.GROSS PROFIT METHODLO 425%100% + 25%= 20% of sales(b) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of cost.GROSS PROFIT METHODLO 4Disadvantages:It is an estimate.It generally relies on past percentages in determining the markup.Care must be exercised when applying a blanket gross profit rate when there are varying gross profits.Normally unacceptable for financial reporting purposes. GAAP requires a physical inventory as additional verification.Evaluation of Gross Profit MethodGROSS PROFIT METHODLO 4Managers and analysts closely follow gross profits. A small change in the gross profit rate can significantly affect the bottom line. At one time, Apple suffered a textbook case of shrinking gross profits. In response to pricing wars in the personal computer market, Apple had to reduce prices more quickly than it could reduce its costs. As a result, gross profit declined and so did its stock price. However, times are now changing. Apple’s stock price is increasing, and one of the key drivers behind the high stock valuations is Apple’s improved gross profit. Perhaps this is not so surprising when you consider the success of its iPhone 6, its upgrades, and now the Apple watch! Here are two other examples of how gross profit and stock price are very much correlated. Nike—the largest global manufacturer of athletic footwear—at one time reported earnings that indicated falling gross profit, leading market analysts to adjust Nike’s stock price downward. The cause—continuing downward pressure on its gross profit. On the positive side, an increase in the gross profit rate provides a positive signal to the market. For example, just a 1 percent boost in Dr. Pepper’s gross profit rate cheered the market, indicating the company was able to avoid the squeeze of increased commodity costs by raising its prices.WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? THE SQUEEZESources: Trefis, “Nike’s Earnings Reiterate Gross Margin Pressure,” (March 23, 2011); D. Kardous, “Higher Pricing Helps Boost Dr. Pepper Snapple’s Net,” Wall Street Journal Online (June 5, 2008); and D. Sparks, “Will Apple Inc.’s Profit Margin Continue Upward?” The Motley Fool (December 4, 2014).Understand and apply the lower-of-cost-or-net realizable value rule.Understand and apply the lower-of-cost-or-market rule.Understand other inventory valuation issues.LEARNING OBJECTIVESDetermine ending inventory by applying the gross profit method.Determine ending inventory by applying the retail inventory method.Explain how to report and analyze inventory.After studying this chapter, you should be able to:Inventories: Additional Valuation Issues9LO 5RETAIL INVENTORY METHODA method used by retailers, to value inventory without a physical count, by converting retail prices to cost.Requires retailers to keep:Total cost and retail value of goods purchased. Total cost and retail value of the goods available for sale. Sales for the period.MethodsConventionalCostLIFO RetailDollar-value LIFOLO 5Illustration: Fuque Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October.Instructions: Prepare a schedule computing retail inventory using the following methods: (1) Conventional (LCM)(2) CostRETAIL INVENTORY METHODLO 5RETAIL INVENTORY METHODLO 5RETAIL INVENTORY METHODLO 5Markups, markdowns, cancellations how can retailers keep up? Well, it can be pretty tough, but it may be getting more manageable with some innovative technology. It used to be that a company like Nebraska Furniture Mart would have to dispatch an army of employees each morning to update printed price labels throughout its stores, to maintain its pledge to offer the lowest prices on televisions, dishwashers, sofas, and flooring. But after a major investment in digital price displays, a single worker can now quickly update the prices for thousands of products at multiple locations. This helps Nebraska match price changes at competitors, like Home Depot and Sears. At present, Nebraska resets prices at the beginning of each day, so the investment in inventory technology may not be as effective in competing with online retailers, such as eBay and Amazon.com, which commonly change prices throughout the day (Nebraska does not want the price of a product to change as a customer is walking up to the checkout). Nonetheless, digital price displays help Nebraska (and other brick-and-mortar retailers) stay competitive and should reduce the cost of implementing the retail inventory method in its accounting system.Source: Anonymous, “Stores Try Fixed Prices That Aren’t So Fixed,” Businessweek (August 2, 2015), p. 22.WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? PRICE FIXINGLO 5Freight costsPurchase returnsPurchase discounts and allowancesTransfers-inNormal shortagesAbnormal shortagesEmployee discountsSpecial Items Relating to Retail MethodWhen sales are recorded gross, companies do not recognize sales discounts.RETAIL INVENTORY METHODLO 5ILLUSTRATION 9-27 Conventional Retail Inventory Method— Special Items IncludedUsed for the following reasons:To permit the computation of net income without a physical count of inventory.Control measure in determining inventory shortages. Regulating quantities of merchandise on hand. Insurance information.Some companies refine the retail method by computing inventory separately by departments or class of merchandise with similar gross profits.Evaluation of Retail Inventory MethodRETAIL INVENTORY METHODLO 5Understand and apply the lower-of-cost-or-net realizable value rule.Understand and apply the lower-of-cost-or-market rule.Understand other inventory valuation issues.LEARNING OBJECTIVESDetermine ending inventory by applying the gross profit method.Determine ending inventory by applying the retail inventory method.Explain how to report and analyze inventory.After studying this chapter, you should be able to:Inventories: Additional Valuation Issues9LO 6Accounting standards require disclosure of:PRESENTATION AND ANALYSISPresentation of InventoriesComposition of the inventory, inventory financing arrangements, and the inventory costing methods employed. Consistent application of costing methods from one period to another.Inventory composition either in the balance sheet or in a separate schedule in the notes.LO 6Significant or unusual financing arrangements relating to inventories. Inventories pledged as collateral for a loan in the current assets section rather than as an offset to the liability.Basis on which it states inventory amounts (lower of-cost-or-market) and the method used in determining cost (LIFO, FIFO, average cost, etc.).Accounting standards require disclosure of:PRESENTATION AND ANALYSISPresentation of InventoriesLO 6ILLUSTRATION 9-28Disclosure of Inventory MethodsPRESENTATION AND ANALYSISPresentation of InventoriesLO 6LO 6ILLUSTRATION 9-29Disclosure of Trade Practice in Valuing InventoriesPresentation of InventoriesPRESENTATION AND ANALYSISCommon ratios used in the management and evaluation of inventory levels are inventory turnover and average days to sell the inventory.Analysis of InventoriesPRESENTATION AND ANALYSISLO 6Measures the number of times on average a company sells the inventory during the period. Inventory TurnoverIllustration: In its 2014 annual report Kellogg Company reported a beginning inventory of $1,248 million, an ending inventory of $1,279 million, and cost of goods sold of $9,517 million for the year. PRESENTATION AND ANALYSISILLUSTRATION 9-30Inventory TurnoverLO 6ILLUSTRATION 9-30Measure represents the average number of days’ sales for which a company has inventory on hand.Average Days to Sell Inventory365 days / 7.53 times = every 48.5 daysAverage Days to SellPRESENTATION AND ANALYSISLO 6Primary reason to use LIFOTax advantages.Results in a better matching of costs and revenues.The use of LIFO retail is made under two assumptions: stable prices and fluctuating prices.APPENDIX 9ALIFO RETAIL METHODSLO 7 Determine ending inventory by applying the LIFO retail methods.STABLE PRICES—LIFO RETAIL METHODA major assumption of the LIFO retail method is that the markups and markdowns apply only to the goods purchased during the current period and not to the beginning inventory.APPENDIX 9ALIFO RETAIL METHODSLO 7Illustration: Fuque Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October.Instructions: Prepare a schedule computing estimate retail inventory using the LIFO Retail method.APPENDIX 9ALIFO RETAIL METHODSLO 7APPENDIX 9ALIFO RETAIL METHODSLO 7ILLUSTRATION 9A-1LIFO Retail Method—Stable Prices2014APPENDIX 9ALIFO RETAIL METHODSLO 7ILLUSTRATION 9A-2Ending Inventory at LIFO Cost, 2017—Stable PricesInventory is composed of two layers.APPENDIX 9ALIFO RETAIL METHODSLO 7ILLUSTRATION 9A-3Ending Inventory at LIFO Cost, 2018—Stable PricesNotice that the 2017 layer is reduced from $11,000 to $5,000.APPENDIX 9ALIFO RETAIL METHODSLO 7FLUCTUATING PRICES—DOLLAR-VALUE LIFO RETAILIf the price level does change, the company must eliminate the price change so as to measure the real increase in inventory, not the dollar increase.APPENDIX 9ALIFO RETAIL METHODSLO 7Illustration: Assume that the beginning inventory had a retail market value of $10,000 and the ending inventory had a retail market value of $15,000. Assume further that the price level has risen from 100 to 125. It is inappropriate to suggest that a real increase in inventory of $5,000 has occurred. Instead, the company must deflate the ending inventory at retail.*1.25 = 125 ÷ 100APPENDIX 9ALIFO RETAIL METHODSILLUSTRATION 9A-4Ending Inventory at Retail— Deflated and RestatedLO 7Illustration: Assume that the current 2017 price index is 112(prior year = 100) and that the inventory ($56,000) has remained unchanged.ILLUSTRATION 9A-5Dollar-Value LIFO Retail Method—FluctuatingPricesAPPENDIX 9ALIFO RETAIL METHODSLO 7Illustration: From this information, we compute the inventory amount at cost:Hernandez must restate layers of a particular year to the prices in effect in the year when the layer was added.APPENDIX 9ALIFO RETAIL METHODSILLUSTRATION 9A-6Ending Inventory at LIFO Cost, 2017—Fluctuating PricesLO 7ILLUSTRATION 9A-7 Comparison of Effect of Price AssumptionsDifference between the LIFO approach (stable prices) and the dollar-value LIFO method.The difference of $3,780 results from an increase in the price of goods, not from an increase in the quantity of goods.APPENDIX 9ALIFO RETAIL METHODSLO 7Illustration: Using the data from the previous example, assume that the retail value of the 2018 ending inventory at current prices is $64,800, the 2018 price index is 120 percent of base-year, and the cost-to-retail percentage is 75 percent. SUBSEQUENT ADJUSTMENTS UNDER DOLLAR-VALUE LIFO RETAILAPPENDIX 9ALIFO RETAIL METHODSILLUSTRATION 9A-8Ending Inventory at LIFO Cost, 2018—Fluctuating PricesLO 7Illustration: Conversely assume that in 2018 the ending inventory in base-year prices is $48,000. Compute the ending inventory at LIFO cost.APPENDIX 9ALIFO RETAIL METHODSSUBSEQUENT ADJUSTMENTS UNDER DOLLAR-VALUE LIFO RETAILILLUSTRATION 9A-9Ending Inventory at LIFO Cost, 2018—Fluctuating PricesLO 7CHANGING FROM CONVENTIONAL RETAIL TO LIFOIllustration: Hackman Clothing Store employs the conventional retail method but wishes to change to the LIFO retail method beginning in 2018. The amounts shown by the firm’s books are as follows.APPENDIX 9ALIFO RETAIL METHODSLO 7LO 7Conventional Retail Inventory MethodAPPENDIX 9ALIFO RETAIL METHODSILLUSTRATION 9A-10Conventional Retail Inventory MethodHakeman Clothing can then quickly approximate the ending inventory for 2017 under the LIFO retail method.The difference of $500 ($11,250 - $10,750) between the LIFO retail method and the conventional retail method is the amount by which the company must adjust beginning inventory for 2018.APPENDIX 9ALIFO RETAIL METHODSILLUSTRATION 9A-11Conventional to LIFO Retail Inventory MethodLO 7RELEVANT FACTS - SimilaritiesIFRS and GAAP account for inventory acquisitions at historical cost and evaluate inventory for LCNRV subsequent to acquisition.Who owns the goods—goods in transit, consigned goods, special sales agreements—as well as the costs to include in inventory are essentially accounted for the same under IFRS and GAAP. LO 8 Compare the accounting procedures related to valuation of inventories under GAAP and IFRS.RELEVANT FACTS - DifferencesThe requirements for accounting for and reporting inventories are more principles-based under IFRS. That is, GAAP provides more detailed guidelines in inventory accounting.A major difference between IFRS and GAAP relates to the LIFO cost flow assumption. GAAP permits the use of LIFO for inventory valuation. IFRS prohibits its use. FIFO and average-cost are the only two acceptable cost flow assumptions permitted under IFRS. Both sets of standards permit specific identification where appropriate.IFRS does not have an exception to the LCNRV rule for the LIFO/retail inventory methods (IFRS does not allow LIFO). GAAP, on the other hand, for LIFO/retail inventory method companies, defines market as replacement cost subject to the constraints of net realizable value (the ceiling) and net realizable value less a normal markup (the floor). IFRS does not use a ceiling or a floor to determine lower-of-cost-or-market. RELEVANT FACTS - DifferencesUnder GAAP, if inventory is written down under the LCNRV or lower-of-cost-or-market valuation, the new basis is now considered its cost. As a result, the inventory may not be written back up to its original cost in a subsequent period. Under IFRS, the write-down may be reversed in a subsequent period up to the amount of the previous write-down. Both the write-down and any subsequent reversal should be reported on the income statement. IFRS requires both biological assets and agricultural produce at the point of harvest to be reported at net realizable value. GAAP does not require companies to account for all biological assets in the same way. Furthermore, these assets generally are not reported at net realizable value. Disclosure requirements also differ between the two sets of standards.ON THE HORIZONOne issue that will be difficult to resolve relates to the use of the LIFO cost flow assumption. As indicated, IFRS specifically prohibits its use. Conversely, the LIFO cost flow assumption is widely used in the United States because of its favorable tax advantages. In addition, many argue that LIFO from a financial reporting point of view provides a better matching of current costs against revenue and therefore enables companies to compute a more realistic income.All of the following are key similarities between GAAP and IFRS with respect to accounting for inventories except:costs to include in inventories are similar.LIFO cost flow assumption where appropriate is used by both sets of standards.fair value valuation of inventories is prohibited by both sets of standards.guidelines on ownership of goods are similar.IFRS SELF-TEST QUESTIONAll of the following are key differences between GAAP and IFRS with respect to accounting for inventories except the:definition of the lower-of-cost-or-market test for inventory valuation differs between GAAP and IFRS.average cost method is prohibited under IFRS.inventory basis determination for write-downs differs between GAAP and IFRS.guidelines are more principles based under IFRS than they are under GAAP.IFRS SELF-TEST QUESTIONUnder IFRS, agricultural activity results in which of the following types of assets?I. Agricultural produceII. Biological assetsI only.II only.I and II.Neither I nor II.IFRS SELF-TEST QUESTION“Copyright © 2016 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”COPYRIGHT