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This assignment aims to demonstrate a clear explanation and comparison of inventory accounting standards related to that occur in the US and at international level. Furthermore it will cover historical background and objectives of the boards used by companies internationally. After that it will move on to specific measurements and presentation styles of each companies annual report and the way they represent data about the valuation of their inventories. We also compare the accounting board in the US, which is the GAAP and the IFRS which is accepted in Europe for instance. After completing that, we start looking at examples that may be related to both accounting concepts the GAAP and IFRS. Final part of this work consists of a discussion and a conclusion, which covers the main differences principles of the boards.
Accounting and found Setting the financial operations of companies over the years seemed to interest in the profession to meet the requirements of the users of that information in this sense are starting to professional accounting development of accounting standards are adhered to one of these standards is Inventories, which we will address later. Standard No. 2 of the International Accounting Standards was set up by the Commission on International Standards in 1993 and has been replaced to replace the evaluation criteria, view inventory in the context of a historical cost (which was released in 1975).In 1997, new interpretations by the Commission on the development of" SIC" was added different versions of the cost of inventory. In 1999 and 2000, made amendments to International Accounting Standards No. 2 (iasb 2009). In 18 December IASB issued revised version of IAS 2, January 2005 Effective date of IAS 2 (iasplus 2003).
The objective of this standard is to describe the accounting treatment of inventories; first point is the amount of cost and recognition as an asset of as an asset traded. In order to achieve revenue related issues, this standard provides guidance on determining the costs and subsequent costs as an expense. (iasb 2009). The purpose of this standard is to determine the real income of the inventory by linking revenues from the inventory with the cost of acquiring it. (socpa2006.) accounting standards (2006). This standard determines the cost of inventory.
4. Underlying rationales and relation with IASB's conceptual framework
FIFO is prohibited under IFRS (IAS2) Quoting from this policy taxpayers have the freedom to choose the method of valuation of the alternatives available when choosing these tax practices, Because LIFO is acceptable and usually reduces the tax burden without compromising the final results of the financial reports, the relation between IASB and IFRS in terms of IAS 2- Inventories is that, IASB has banned using LIFO as a method to measure Inventories for a company which is dealing under IFRS. (goliath2004).
5. Measurement of inventories
Inventory is measured at less cost and net realizable value of cost of inventories it also should include the cost of inventory and all the costs of purchase and the costs of conversion and other extra expenses incurred to deliver inventory to current status (iasb 2009). "When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised".
5.1. Costs of purchase
Inventory purchase costs include the purchase price, import duties and other taxes except those taxes that can be recovered by the tax authorities and the transport, handling and other direct costs associated with the acquisition of finished goods, materials and services(iasb 2009).
5.2. Costs of conversion Costs of conversion of inventories include adaptive related immediate production units, such as direct employments also include the costs of production which has remained stable regardless of the costs of production(iasb 2009).
5.3. Other costs
costs incurred in providing the inventory to its present and its current status, for example, costs incurred by the company's non-productive overheads or the costs of designing products to customers may be appropriate to include in the cost of inventory. the exclusion of certain costs that are not directly connected with the stock, such as storage costs that are not necessary in the production process also excluded the costs of the sale is not included in the cost of inventory(iasb 2009).
5.4.Cost of inventories of a service provider
These costs consist primarily of the presence of labour and other costs of personnel directly involved in the provision of service, including supervisors. Also another measure is a measure of Cost of agricultural produce harvested from biological assets. To complete the process of measuring inventory using some techniques such as cost method or style retail(iasb 2009).
Must disclose the accounting policies adopted in measuring inventories, including the cost formula used and the total value of inventories and the carrying amount in classifications also include disclosure of inventory value less costs to sell and the amount of inventories recognized as an expense during the period and the amount of any write-off of inventories recognized as an expense. Moreover, increase in the amount of any write-down led to a decrease in the amount of inventory recognized during the period and circumstances or events that led to a reflection of the write-down of inventories and "the carrying amount of inventories pledged as security for liabilities" This should include disclosure information on the book value and the extent of changes that have taken place on these assets is very important for users of financial statements are also production requirements, added to the above mentioned materials and work in progress.(bzconsult 2003).
7. Comparison with US GAAP
One of the differences between the US accounting standard and the IFRS is that the US concept does include costing methods such as average cost, FIFO and LIFO in their measurements. However, the IFRS has banned the method of LIFO costing in their statements. The US GAAP does not illustrate any rules related to biological inventory, growing crops for instance. On the other hand, the IAS 1 measures biological inventories related to changes in value reported in income. Presentation is on both sides at lower of cost; however the IFRS shows net realizable value and the US standard the market required value. Only in certain circumstances the GAAP determines presentation at fair value such as, gold mining in excess of cost permitted for example. The IFRS in contrast, demonstrates fair value in excess of actual cost for agricultural goods. According to the policy of IFRS, particular costs cannot be added to overhead charge in inventory cost. The IFRS also does not allow adding up costs to overhead charge in inventory cost. According to the GAAP the reduction of costs on inventories cannot be illustrated in statements. In addition, market adjustment can also not be reversed on statements. The IFRS in comparison represents a totally different picture of the costs that can be reversed to the right of the standards. In actual fact, they only allow it certain conditions and clear defined terns for it. Losses of inventory resources in specific markets is not considered under the GAAP, however the IFRS for example, recognises it as essential to restore the losses of inventories in the market. Furthermore, they need guidance in the areas of disclosure and accounting for inventories of service providers offered. To conclude the comparison, The IFRS has to offer a wider range of rules and policies related to accounting concepts and methods at international level. The GAAP on the other side does not have as much rules as the IFRS, such as not considering significant points as the lowering of costs on inventories for instance.(ifrsaccounting 2010)
8. Example from annual reports
In this research we chose two companies operating in US and the Uk they use different method to evaluate their inventory. Wal-Mart a US grocery supermarket chain for example uses the method of the last-in, first out (LIFO) in their accounting. Inventory for international activities are measured under the first-in, first-out ("FIFO") method. The retail ratio for FIFO is concerned on the initial margin of beginning inventory plus the fiscal year purchase activity. The reserves for LIFO are based on the initial margin of the fiscal year purchase activity less the impact of any markdowns.(wal* mart2009) Annual report. Accounting principles and rules of the GAAP are followed by the giant chain Wal-Mart in the US grocery market. The retail management need to make clear and appropriate decisions about the end valuation of their inventories. The company calculates its LIFO by using factors such as, inventory levels, mark up rates and internally generated retail price indices. Physical inventory is counted up on the basis of percentage sales made in the year. .(wal* mart2009) Annual report
The Group of Sainsbury in the UK follows the regimes and policies of the IFRS and inventories
are valued at lower cost. At the warehouse, inventories are valued on the basis of first in, first out method. Cost of supermarket chain includes all spending made in their activities. According to the statement of Sainsbury, inventory expense after a period of 52 weeks ending on the 21st March 2009 shows an expense of 14,490 million Pounds with altogether 689 goods held for resale in the warehouse.(Sainsbury 2009) Annual report.
9. Discussions and Conclusion
The American company applied the method of last-in, first out (LIFO) which is prohibited by IFRS that the difference in measurement method will lead to different results if applied International Accounting Standards and they use ("FIFO") for inventory for international activities which is accepted in both standards , While the British company used the International Standards ( IFRS) to evaluate their inventory using the method of ("FIFO") Which is in accordance with International Accounting Standards.
Based on the discussion above, it is safe to conclude that International Accounting Standards
Will become more applicable and will be preferred by local companies, this change is expected will not only applicable to standard inventory only, but all the accounting standards.