Transcript Inventories- GAAP vs. IFRS

Inventories- US Generally Accepted
Accounting Principles (GAAP) vs.
International Financial Reporting
Standards (IFRS)
Julia Makarieva
Jennifer Waclawik
Becky Fay
Grayson Schrantz
Alex Perez
Definition of Inventory
US GAAP- considered more rules 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.
IFRS- considered more principle based
Assets that are:
• Held for sale in the ordinary course of
business
• 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.
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 longterm assets subject to depreciation
when put into use
(330-10-20)
Standard applies to all inventories except:
• Work in progress arising under
construction contracts
• Financial instruments
• Biological assets
Costs Included in Inventory
US GAAP - 330-10
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
Costing Methods (Cost Flow
Assumptions)
US GAAP – 330-10
IFRS - IAS 2
• LIFO (last-in, first-out), FIFO (first-in,
first-out), Weighted Average, and
sometimes Specific Identification.
(330-9-30)
• LIFO is prohibited (IAS 2.25)
• Ending Inventory, Cost of Goods
Sold, Tax, and Net Income
• Based off of periodic income
• Inventories similar in nature or use, to
the entity, must have the same cost
formula.
• Standard cost and retail methods are
used
• Standard cost and retail methods are
used
• Uniform within industries
• Uniform within industries
Measurement of Inventories
US GAAP - 330-10
IFRS – IAS 2
• Inventory carried out at lower of cost
or market (LOCOM). (330-8-35)
• Inventory carried out at lower of cost
and net realizable value. (IAS 2.9)
• Write-downs of inventories are
required
• Write-downs of inventories are
required
• Reversal of prior write-downs are not
allowed
• Reversal of prior write-downs are
allowed
• Write-downs can be done on an itemby-item, group-by-group, or total
inventory basis
• Write-downs are done on an item-byitem basis
• Write-downs must be included as an
expense
• Write-downs and reversal of writedowns must be included as an expense
Required Disclosures:
US GAAP – 330-10
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
Advantages and Disadvantages
US GAAP
Advantages
Disadvantages
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IFRS
clarity in application
reduction of risk
comparability for companies in
the same industry for the same
rule
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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
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allowing preparers the ability
to consider the best way to
account for and report a
transaction
increased comparability among
companies with similar
transactions
Easier to manipulate
transactional accounting
increased variations in
accounting approaches for
similar transactions
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).
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
Audit Problems with IFRS
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Where is the line drawn?
Consistency of Measurement
Reversal transactions
Allows multiple methods if identical
Consistency is key!!
Net realizable value
Audit Problems with GAAP
• Obsolete inventory
• Potential solution
• Bill and Hold scam
• Good auditing
• Potential solution
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.
Sources
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http://ifrsusa.wordpress.com/2011/04/05/which-is-better-%E2%80%93-principles-or-rules/
http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias2_en.pdf
www.csb.uncw.edu/people/rocknessj/classes/.../InventoryIFRS.ppt
http://www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November
_2012/$FILE/US_GAAP_v_IFRS_The_Basics_Nov2012.pdf
http://cpaclass.com/gaap-accounting-standards/codification-300/asc-codification-topic330.htm
https://checkpoint.riag.com/app/view/previewDocNew?feature=tcheckpoint&lastCpReqId=4
700635&preview=y&linkid=162&linkType=tlltype&DocID=iGAAPCD13%3A4822.1&pinpnt=cit
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http://www.journalofaccountancy.com/Issues/1999/Oct/carmichl.htm
http://www.accountingtools.com/obsolete-inventory-accounting
http://www.thefreelibrary.com/Inventory+valuation+under+IFRS+and+GAAP%3A+this+article
+is+based+on+a...-a0284451759