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Since the mid-1960s, the accountancy profession has been embroiled with a growing mass of regulation governing the measuring, presentation, and disclosure of financial information. Therefore, in July 1973 the International Accounting Standards Committee (IASC) was established and came into existence in further of an agreement by accountancy bodies of the USA, Australia, Canada, France, Germany, the UK, Japan, Mexico, the Netherland and Ireland. Since the mentioned date, IASC is responsible on organizing the practice and the accounting roles in these countries.
After virtually two decades and half of achievement, however, it was recognized by IASC in 1997 that in order to curry on perform its role successfully and efficiently, as the last should have got the right way to bring about convergence between national accounting standards and practice and high-quality worldwide accounting standards. In order to do that, IASC suggested the requirement to change and improve the current structure and scheme. In December 1999 however, the IASC Board approved the proposals unanimously. In July 2000, the standards- setting board body was renamed the International Accounting Standards Board (IASB), which would operate under the new international accounting standards committee Foundation (IASCF) as it is shown in the diagram in figure (1)
Figure one: the current structure of IASB Source: IASPLUS
In terms of the adoption the IFRS however, In 2001, the International Accounting Standards Board's (IASB)Â assumed the role of international accounting standard setting body. It has issued eight standards (IFRS) and 12 integrations, which 11 of them are in effect today. Thus, Due to growing acceptance of the IASC foundation; today, more than 100 countries have or soon will be utilizing IFRS as adopted by IASB. Moreover, Ball (2005) reports that many countries have or considering IFRS as adopted by IASB as the sole financial reporting model, replacing the country's existing GAAP. For example, in 2005 in the EU, at least 7000 listed firms in 25 countries have converted to IFRSs, as it is indicated the level of IFRS adoption at present in the figure two.
Blue areas indicate countries that require or permit IFRSs
Grey areas are countries seeking convergence with the International Accounting Standards Board (IASB) or pursuing adoption of IFRSs
Figure ( 2) IFRS adoption and use around the world Source: www. IASB.org
The aim of this essay is to represent an overview image on the international accounting standred IAS2- Inventories
IASB's conceptual framework
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According to the discussion paper based on the preliminary views on an improved conceptual framework for financial reporting by IASB in November 2006, that the framework is coherent system of concepts that flow from an object, as the purpose of financial statements is identified by those objectives, which has mentioned previously. However, in terms of the IASB framework, that it could be briefly conclude that the core purpose of this framework is that to reliably and objectively prepare and present the financial information via financial statement for external users in order to assist the IASB to improve and develop both the existing IFRSs as well as the future IFRSs. Moreover, it is also to improve the harmonasation of regulations. The IASB also might be applied in order to assist the external auditors to forming their independent opinion that whether the provided financial statements confirm with IFRSs. However, without existing such a guidance provided by the established IFRS framework, standards-setting would be based on the personal framework which developed by the individual members of standards-setting.
IAS 2- Inventories
International accounting standard 2 Inventories (IAS 2) issued in December 1993 (replaced October 1975 version of IAS 2) as it has been applied for annual period beginning since January 2005. The recent amendment by IFRS 8 issued in November 2006.
IAS 2 Inventories prescribes the measurement of inventories, including the amount to be initially recognised as an asset in the balance sheet and, subsequently recognised as an expense in the income statement, including any write-down to net realisable value
The Objectives IAS
The core objective of this standard IAS 2 is to prescribe the accounting treatment for inventories. A prime issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised. This standard provides guidance on determination of cost and its subsequent recognition as an expense, including any-write- down to net realisable value. Moreover, It also provides guidance on the cost formulas that used to assign costs to inventories.
The following terms are used in this standard with the meaning specified:
Inventories are assets which:
â- held for sale in the ordinary course of business;
â- in the process of production for such sale; or
â- in the form of materials or supplies in order to be consumed in the production process or in the rending for services.
Net realisable value (NRV): is the estimated selling price in the ordinary course of business with a reduction of the estimated costs of completion and estimated necessary which have to make the product ready for sale.
Fair value (FV): is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
In terms of measuring the financial reporting items, Alexander, et al (2005) state that the Inventory is one of the characteristics that is listed in the financial statement via the balance sheet of an entity under current assets' category. In some entities however, inventory is one of the most significant assets that firm rely on in its operations, and therefore, this item has to be measured and recorded accurately in order to represent the exact value of cost of goods sold, for this reason this value verify the amount value of net income for particular firm.
Under the International Accounting Standards, the inventories are represented in the financial statement by measuring the lowest
In terms of determine the cost of inventories, under IRFS the methods of FIFO( first-in, first out) as ell as the weighted average are authorized to be used, whereas these methods are not in use by US. GAAP, as the method of LIFO( last-in, first out) is allowed to be applied in terms of adjust the inventories cost in the financial reports. Moreover, Under US. GAAP it is not prohibited to use the methods of FIFO and the weighted average at the same time with LIFO method which is not allowed to be used according to IAS 2 as previously mentioned.
Comparison between IFRS and US. GAAP from annual report
According to US. GAAP, that under this standards firms are required to use the LIFO method in order to report the inventories via financial reports at FIFO, and therefore it is frequently unlikely to used the FIFO method in adjusting the financial reporting provided under us standards in order to be compared with those reports under IFRS. Moreover, the value of the inventories of Lufkin Industries Inc at the end of financial year 31/12/2008 at LIFO method was 128.627 million, compared with the amount value of this item at FIFO adjustment which is 90.696 millions( annualreport, 2008).
Under both standard US. GAAP and IFRS, the inventory item presented on the financial reporting via the Balance sheet indicated under the current assets. According to IAS2, this item is presented at the lower of cost and net realisable value(IAS2, para 9). US GAAP however, require that this item should presented as its lower of cost and market value. Moreover, in terms of the adjustments; IFRSs require that the this item should be adjusted at the lower of cost as the market is able to be reserved under certain conditions. On the other hand, it is not permitted to do so under the US. GAAP.
US GAAP does not require any specific layout for the financial statements as long as revenues, expenses, gains, losses, and reclassifications are properly classified by net asset class, and the change in net assets is presented both by net asset class and in total. This is applied to IFRS too since there is no particular layout, but it should include a list of minimum items of which are less regulatory than the requirements in regulations S-X.( Ernst & Young LLP 2009(9), Larkin & DiTommaso 2004).
Comparison with US GAAP
Inventory-Two key differences exist in the area of inventory valuation. First, IFRS prohibits the use of the LIFO (Last-in, First-out) inventory valuation method allowed under U.S. GAAP. Second, IFRS requires the reversal of inventory write-downs under certain conditions, whereas reversals are prohibited under U.S. GAAP.
According to IAS2, this standard sets forth certain disclosure requirements relative to inventory accounting methods employed by the reporting entity. Thus, Financial statements disclose the following information:
âž£ the accounting policies adopted for the valuation of stocks, including the
formula for assessing the costs which have been used;
âž£ the total amount of stock in books, and sums according to the classification
that is appropriate for that entity;
âž£ the carrying amount of stocks to be accounted for at fair value minus cost of
âž£ the amount of stocks recognized as an expense during the period;
âž£ the amount of sales value of stocks has been recognized as an expense in the
year, in accordance with paragraph 34;
âž£ the amount of reversals in the previous sales value, which has been recognized
as a reduction in the amount of spending by stocks in the exercise, in accordance
with paragraph 34;
âž£ the circumstances or events that have resulted in the reversal of sales value,
according to the said paragraph 34;
âž£ the carrying amount of stock pledged as security for the discharge of debts.
Discussions and summary
U. S. GAAP considers inventory cost at the time it was placed in inventory, whereas International Accounting Standards base the cost on the order in which the products are sold. When possible, international standards prefer that the specific identification method be used. When it is not practical to track inventory costs on a unit basis, international standards permit either the first-in, first-out (FIFO) method or the weighted average cost method. Lifo is not permitted, as it is under U.S. standards. Fortunately, U.S. standards require companies using LIFO to report the FIFO inventory value, and thus it is generally possible to adjust the U.S. financial statements for comparability with firms that do not use LIFO.
Both standards require inventory to be stated at the lower of cost or market value, and inventory that has declined in value must be written down. Under U.S. standards these writedowns cannot be reversed even if the inventory subsequently rises in value. International standards do permit reversal of inventory writedowns