Organizations that are considering a conversion to the International Financial Reporting Standards (IFRS) from U.S. Generally Accepted Accounting Policies (U.S. GAAP) should note that inventory is accounted for in a similar manner with a few notable exceptions. This article is the part of a series covering considerations for organizations contemplating a conversion from U.S. GAAP to IFRS.
Under both the U.S. GAAP Accounting Standard Codification Section 330 and IFRS’s International Accounting Standard 2, Inventories, inventory is defined as assets held for sale in the ordinary course of business or in the process of production, or an asset to be consumed in the production of goods or services.
Inventory under both standards permits FIFO, retail and weighted average costing methods. The LIFO method permitted under U.S. GAAP is not permitted under IFRS. Any organization using the LIFO inventory method for book and tax purposes would need to select a different method as part of its conversion to IFRS, which could result in a significant tax impact. Both standards define the cost of inventory as all direct expenditures to bring inventory to sale, including an allocation of overhead. Selling costs along with general administrative costs are excluded from inventory overhead capitalization under both standards.
The measurement of inventory under FIFO and weighted average costing has seen convergence between the standards, which now require inventory to be stated at the lower of cost and net realizable value (NRV). NRV is defined slightly differently under the two standards. U.S. GAAP defines NRV as the estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation. IFRS defines NRV more generally as the estimated selling price less the estimated costs necessary for the sale.
Both standards require write-downs when the inventory costs exceed the NRV. Under U.S. GAAP, these costs cannot be reversed, and the reserves in place are only removed on an individual-item basis when the inventory is either sold or when it is disposed and completely written off. Under IFRS, write-downs can be reversed if current information indicates that the reasons for the asset impairment no longer exist. IFRS inventory can then be carried at an amount up to the original cost based on the facts and circumstances at the measurement date.
Under IFRS, each interim period is viewed as a discrete reporting period rather than an integrated part of an annual period, as interim reporting is considered under U.S. GAAP. Therefore, the measurement of inventory reserves and allocation of the overhead burden should be assessed each interim reporting measurement date based on the significance of these balances. Abnormally low production periods should result in some overhead costs being expensed in the month incurred.
Organizations consolidating multiple entities under IFRS also need to ensure that all entities use the same accounting policies to arrive at their inventory valuation. If entities do not use the same policies, then IFR 10, Consolidation, requires that adjustments must be made during consolidation to ensure conformity with the group accounting policies.
Schneider Downs provides assurance and advisory services for international entities and organizations following IFRS. For more information concerning international business matters and their impact to your organization, please visit the Schneider Downs Our Thoughts On blog or email us at [email protected].
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.