The Accounting For Inventory Accounting Essay


Inventory management is mainly about specifying the size and position of stocked goods. Inventory management is essential at different locations within a facility or in multiple locations of a supply network to guard the regular and intended course of production against the random disturbance of running out of resources or commodities. The range of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, profits and defective goods and demand forecasting.

IAS 2 Inventories as issued at 1 January 2012. Comprise IFRSs with an effective date after 1 January 2012 but not the IFRSs they will replace. The objective of this Standard is to set down the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be acknowledged as an asset and carried forward until the interrelated revenues are recognized. This Standard provides control on the determination of cost and its following recognition as expenditure, including any write-down to net realizable value. It also supplies supervision on the cost formulas that are used to allot costs to inventories.

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Inventories shall be measured at the lesser of cost and net achievable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs acquired in bringing the inventories to their present location and state.

The cost of inventories shall be due by using the first-in, first-out (FIFO) or weighted average cost method. An entity shall use similar cost formula for all inventories encompassing a related nature and use to the entity. For inventories with a unlike nature or use, diverse cost formulas may be justified. However, the price of inventories of items that are not generally interchangeable and commodities or services produced and segregated for particular projects shall be assigned by using precise identification of their individual cost.

When inventories are sold, the shipping amount of those inventories shall be acknowledged as an expense in the time in which the correlated revenue is known. The amount of any write-down of inventories to net achievable value and all losses of inventories shall be acknowledged as an expense in the time the write-down or loss occurs. The amount of every reversal of any write-down of inventories, arising from a raise in net attainable value, shall be recognized as a decline in the amount of inventories documented as an expense in the era in which the reversal occurs.

According to ASC 330 the Inventory Topic deals with the accounting principles as well as reporting practices relevant to inventory. An inventory has financial importance for the reason that revenues may be obtained as of its sale, or else from the sale of the commodities or services in the production of which it is used. Usually such revenues crop up in a continuous recurring process or sequence of operations in which goods are acquired, produced, and sold, and further goods are acquired for supplementary sales. Therefore, the inventory at any given time is the balance of expenditure applicable to goods on hand outstanding after the harmonizing of absorbed costs with concurrent revenues. This balance is aptly carried to future periods given that it does not exceed sum properly chargeable against the revenues anticipated to be obtained from ultimate disposition of the commodities passed forward. In perform, this balance is determined by the procedure of pricing the articles incorporated in the inventory.

A chief objective of accounting for inventories is the accurate determination of income through the course of matching suitable costs against revenues. The Scope Section of the Overall Subtopic establishes the pervasive extent for the Inventory Topic. The direction in the Inventory Topic applies to all entities, with the following credentials. The guidance in this Topic is not necessarily relevant to the following entities: Not-for-profit entities (NFPs); Regulated utilities. Those renowned changes in assets or liabilities are of crucial effect in alteration of accounting principle. An example of a direct outcome is a modification to an inventory balance to effect an alteration in inventory valuation technique. Related changes, such as an effect on delayed income tax assets or liabilities or an impairment modification resulting from applying the lower-of-cost-or-market trial to the adjusted inventory balance, also are examples of direct effects of a change within accounting principle.

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The collective of those items of tangible personal possessions that have any of the following characteristics:

Held for sale in the everyday course of business

In procedure of production for such sale

To be currently utilized in the production of goods or services to be accessible for sale.

The term inventory embraces commodities in anticipation of sale (the merchandise of a trading concern and the completed goods of a producer), goods in the course of production (work in process), and goods to be consumed directly or not directly in fabrication (raw materials and supplies). This meaning of inventories excludes long-term assets subject to depreciation accounting, or commodities which, when brought into play, will be so classified. The fact that a depreciable asset is retired from usual use and seized for sale does not show that the item should be classified as fraction of the inventory. Raw materials and supplies purchased for manufacture may be used or consumed for the building of long-term assets or other purposes not linked to production, but the fact that inventory items representing a little portion of the sum may not be absorbed ultimately in the production process does not need separate classification. By trade practice, operational equipment and supplies of certain types of entities such as oil producers are usually treated as inventory.

Accounting for inventory

Each country has its own policy about accounting for inventory that fit amid their financial-reporting rules. For example, organizations in the U.S. define inventory to ensemble their needs within US Generally Accepted Accounting Practices (GAAP), the rules defined through the Financial Accounting Standards Board (FASB) (and others) and imposed by the U.S. Securities and Exchange Commission (SEC) and further federal and state agencies. Other countries regularly have alike arrangements but with their own accounting principles and national agencies instead.

It is on purpose that financial accounting uses standards that allow the public to contrast firms' performance, cost accounting functions internally to an organization and potentially with much better flexibility. An argument of inventory from standard and Theory of Constraints-based (throughput) cost accounting perception follows some examples and a discussion of inventory from a financial accounting viewpoint.

The internal costing/valuation of inventory can be difficult. Whereas in the earlier period most enterprises ran simple, one-process factories, such enterprises are pretty probably in the minority in the 21st century. Where 'one process' factories exist, at hand is a market for the goods produced, which establishes a self-regulating market value for the good. Today, with multistage-process companies, there is much inventory that would once have been completed commodities which is now held as 'work in process' (WIP). This needs to be valued in the accounts, but the assessment is a management decision since there is no market for the moderately finished product. This rather arbitrary 'valuation' of WIP combined in the midst of the allocation of overheads to it has led to some unintentional and undesirable results.

ASC 330

As used in the phrase lower of cost or market, the word market means current replacement cost (by purchase or by reproduction, as the case may be) provided that it meets collectively of the following conditions:

Market shall not surpass the net achievable value

Market shall not be less than net realizable worth reduced by an allowance for an approximately normal profit margin.

Net Realizable Value is the anticipated selling price in the regular course of business less reasonably expected costs of completion and disposal.

The primary basis of accounting for inventories is cost, which has been defined generally as the price paid or consideration given to obtain an asset. As applied to inventories, cost means in principle the total of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its on hand condition and location. It is understood to mean purchase and production cost, and its determination involves many considerations.

Though principles for the determination of inventory costs may be easily stated, their relevance, particularly to such inventory items as work in process and completed goods, is difficult because of the diversity of considerations in the allocation of costs and charges.

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For instance, variable production overheads are allocated to each unit of production on the basis of the real use of the production facilities. Nonetheless, the allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities. Normal capacity refers to a range of production levels.

Normal capacity is the production anticipated to be achieved over a number of periods or seasons under ordinary circumstances, taking into consideration the loss of capacity resulting from planned maintenance. Some dissimilarity in production levels from time to time is expected and establishes the range of ordinary capacity.

The range of normal capacity will vary based on business- and industry-specific factors. Judgment is necessary to determine when a production level is bizarrely low (that is, outside the range of expected variation in production).

Examples of factors that might be expected to cause an abnormally low production level comprise significantly cheap demand, labor and materials shortages, and unintended facility or equipment downtime.

The actual level of production may be used if it approximates normal capability. In times of abnormally high production, the sum of fixed overhead allocated to every unit of production shall be decreased so that inventories are not calculated above cost. The amount of fixed overhead allocated to every unit of production shall not be better as a consequence of abnormally low production or unused plant.

Unallocated overheads shall be known as an expense in the period in which they are incurred. Other items such as unusual freight, handling costs, and amounts of exhausted materials (spoilage) require treatment as present period charges rather than as a section of the inventory cost.

Also, under most conditions, general and administrative expenses shall be incorporated as period charges, except for the portion of such expenses that may be evidently related to production and thus compose a part of inventory costs (product charges). Selling expenses constitute no fraction of inventory costs. The exclusion of all overheads from inventory costs does not make up an accepted accounting process. The exercise of judgment in an individual condition involves a contemplation of the sufficiency of the procedures of the cost accounting system in use, the reliability of the principles thereof, and their steady application. General and administrative expenses generally shall be charged to expense as incurred but may be accounted for as contract overheads under the completed-contract technique of accounting or, in some situations, as indirect contract costs by government contractors.

Cost for inventory purposes may be determined under any one of numerous assumptions as to the flow of cost factors, such as first-in first-out (FIFO), average, and last-in first-out (LIFO). The major aim in selecting a method should be to decide the one which, under the circumstances, most clearly reflects periodic income.

The cost to be harmonized against revenue from a sale may not be the acknowledged cost of the specific item which is sold, especially in cases in which alike goods are purchase at dissimilar times and at different prices. While in some lines of business precise lots are clearly branded from the time of purchase through the moment of sale and are cost on this basis, ordinarily the identity of commodities is lost between the moment of attainment and the minute of sale.

For that reason, if the resources purchased in various lots are the same and interchangeable, the use of branded cost of the various lots may not make the most useful financial statements. This fact has resulted in the general approval of many assumptions with admiration to the flow of cost factors for instance FIFO, average, and LIFO to provide practical bases for the measurement of periodic income.

Standard costs are acceptable if accustomed at reasonable intervals to reflect present conditions so that at the balance-sheet date standard costs reasonably approximate costs calculated less than one of the known bases. In such cases descriptive language shall be used which will convey this relationship, as, for example, "approximate costs determined on the first-in first-out basis," or, if it is preferred to mention standard costs, "at standard costs, approximating average costs."

In a number of situations a reversed mark-up formula of inventory pricing, such as the sell inventory method, may be both practical and suitable. The business operations in some cases may be such as to make it attractive to apply one of the acceptable methods of determining cost to one section of the inventory or components thereof and one more of the acceptable methods to other portions of the inventory.

Even though selection of the method ought to be made on the basis of the individual circumstances, financial statements will be more useful if identical methods of inventory pricing are adopted by all companies in a given industry.

Whilst the basis of stating inventories does not affect the overall increase or loss on the ultimate temperament of inventory items, any irregularity in the selection or employment of a basis may inappropriately affect the periodic amounts of profits or loss. Because of the common use and significance of periodic statements, a procedure adopted for the handling of inventory items shall be time and again applied in order that the results reported may be fairly allocated between years.

A departure from the cost basis of pricing the inventory is necessary when the usefulness of the goods is no longer as immense as their cost. Where there is substantiation that the utility of commodities, in their disposal in the normal course of business, will be below cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the diversity shall be acknowledged as a loss of the current period. This is usually accomplished by stating such goods at a lower level generally designated as market.

The price basis of recording inventory generally achieves the aim of a proper matching of costs and revenues. However, under certain conditions cost may not be the amount properly chargeable against the revenues of future periods. A different approach from cost is required in these circumstances since cost is reasonable only if the utility of the commodities has not diminished since their acquisition; a loss of usefulness shall be reflected as a charge against the revenues of the time in which it occurs. Thus, in accounting for inventories, a loss shall be renowned whenever the utility of goods is impaired by damage, weakening, obsolescence, changes in price levels, or other causes. The measurement of such losses shall be achieved by applying the rule of pricing inventories at the minor of cost or market. This provides a sensible means of measuring utility and in that way determining the amount of the loss to be recognized and accounted for in the current period.

The regulation of lower of cost or market is planned to provide a means of measuring the remaining usefulness

General Note: The Subsequent Measurement Section provides control on an entity's successive measurement and subsequent recognition of an item. Situations that may consequence in subsequent changes to carrying amount comprise impairment, fair value changes, depreciation and amortization, and so forth of inventory overheads. The term market is therefore to be interpreted as representing utility on the inventory time and may be thought of in terms of the like expenditure which would have to be made in the common course at that date to procure matching utility.

As a general guide, utility is indicated mainly by the current cost of replacement of the commodities as they would be obtained by purchase or reproduction. In applying the rule, nonetheless, judgment must always be exercised and no loss shall be predictable unless the proof indicates clearly that a loss has been persistent. There are then exceptions to such a standard. Replacement or reproduction prices would not be suitable as a measure of utility when the estimated sales value, reduced by the costs of completion and disposal, is lesser, in which case the achievable value so determined more appropriately measures utility.

In addition, when the evidence indicates that cost will be recovered with an approximately normal turnover upon sale in the ordinary course of business, no loss shall be recognized even if substitute or reproduction costs are lower. This might be true, for instance, in the case of production under firm sales contracts at fixed prices, or when a rational volume of future orders is guaranteed at stable selling prices.

Because of the several variations of circumstances encountered in inventory pricing, the meaning of market is intended as a direct rather than a literal rule. It shall be applied practically in light of the objectives articulated in this Subtopic and with due regard to the form, content, and composition of the inventory. For instance, the retail inventory technique, if adequate markdowns are presently taken, accomplishes the objectives stated herein. It is also recognized that, if a business is expected to lose money for a continued period, the inventory shall not be written down to compensate a loss inherent in the succeeding operations.

Depending on the character and composition of the inventory, the law of lower of cost or market may properly be useful either directly to each item or to the sum of the inventory (or, in some cases, to the total of the components of each major category). The manner shall be that which most clearly reflects periodic income.

The reason of reducing inventory to market is to reflect fairly the income of the period. The most widespread practice is to relate the lower of cost or market rule separately to each item of the inventory. However, if there is only one end-product category the cost utility of the total stock-the inventory in its whole-may have the greatest importance for accounting purposes. For that reason, the decrease of individual items to market may not at all time lead to the most useful result if the utility of the total inventory to the business is not lower its cost. This may be the case if selling prices are not affected by temporary or small fluctuations in recent costs of purchase or manufacture.

Likewise, where more than one major product or operational category exists, the application of the lesser of cost or market rule to the total of the material included in such main categories may result in the most useful purpose of income. When no loss of income is anticipated to take place as a outcome of a reduction of cost prices of certain commodities because others forming components of the same general categories of finished products have a market in the same way in excess of cost, such components need not be accustomed to market to the extent that they are in balanced quantities. Therefore, in such cases, the rule of lower of cost or market might be applied directly to the totals of the whole inventory, rather than to the individual inventory commodities, if they enter into the same category of finished product and if they are in balanced quantities, provided the formula is applied time after time from year to year.

To the point, nevertheless, that the stocks of particular resources or components are excessive in relation to others, the more widely familiar procedure of applying the lower of cost or market to the individual items constituting the excess shall be followed. This would also be relevant in cases in which the items go into the production of unrelated products or products having a material deviation in the rate of turnover. Unless a useful method of classifying categories is practicable, the rule shall be functional to each item in the inventory.

Only in extraordinary cases may inventories properly be stated higher than cost. For instance, precious metals having a fixed monetary value with no significant cost of marketing may be declared at such monetary value; any other exceptions must be justified by inability to establish appropriate approximate costs, immediate marketability at quoted market price, plus the characteristic of unit interchangeability.

It is usually recognized that income accrues only at the time of sale, and that profits may not be expected by reflecting assets at their current sales prices. Nevertheless, exceptions for reflecting assets at selling prices are permitted for both of the following:

Inventories of gold and silver, when there is an efficient government-controlled market at a unchanging monetary value

Inventories on behalf of agricultural, mineral, and other products, with all of the following criteria:

Units of which are compatible

Units of which have an direct marketability at quoted prices

Units for which proper costs may be difficult to obtain.

Where such inventories are declared at sales prices, they shall be reduced by expenditures to be acquired in disposal.

The basis of stating inventories shall be constantly applied and shall be revealed in the financial statements; whenever an important change is made therein, there shall be disclosure of the nature of the amend and, if material, the outcome on income. A change of such basis might have an important result upon the interpretation of the financial statements both previous to and after that change, and therefore, in the event of a change, a full disclosure of its nature and of its outcome, if material, upon income shall be made.

Difference between IFRS IAS 2 and USGAAP

IAS 2, Inventories, and ASC Topic 330, Inventory, both normally necessitate that inventories initially are recorded at cost and afterward are tested for impairment by reference to a market-based value. Conversely, neither standard comprises comprehensive, detailed requirements as regards the amounts to be built-in in the cost of inventory.

The most important differences come up in the areas of allowable valuation methodologies, calculation of impairment and acknowledgment of impairment reversals, and the accounting for inventories ensuing from agricultural activities. Examples of precise differences between IFRS and U.S. GAAP comprise the following:

IFRS allows the use of first-in, first-out or weighted average cost inventory valuation methodologies; U.S. GAAP permits the equivalent methodologies as IFRS. U.S. GAAP also consents the use of the last-in, first-out (LIFO) technique, which IFRS does not permit.

IFRS requires that an entity "use the same procedures for all inventories have a correlated nature and use to the entity;" U.S. GAAP does not have such a restriction.

IFRS requires that inventory is approved at the lower of cost or net realizable value; U.S. GAAP requires that inventory is carried at the lesser of cost or market (with market defined as current replacement cost, provided market is not greater than net attainable value and is not less than net realizable value reduced by a normal sales margin). For that reason, required write-downs can be for different amounts under U.S. GAAP compared to IFRS.

IFRS needs reversal of inventory impairments in the period in which an impairment situation reverses (with the reversal restricted to the amount of the original write-down); U.S. GAAP precludes a reversal of preceding inventory write-downs (if not the recovery of inventory occurs within the same yearly reporting period in which the write-down arose).

IFRS generally needs pre-harvest inventories of agricultural producers (e.g., growing crops and production animals) to be calculated at fair value less advertising costs; U.S. GAAP generally needs those inventories to be valued at cost except certain criteria are met.

while substantial and unusual losses upshot from the application of the law of lower of cost or market it will frequently be desirable to reveal the amount of the loss in the income statement as a charge independently identified from the consumed inventory costs depicted as cost of goods sold.

Similarities between IFRS IAS 2 and USGAAP

ASC 330, Inventory, and IAS 2, Inventories, are founded on the principle that the primary basis of accounting for inventory is cost. Both define inventory as property held for sale in the usual course of business, in the process of manufacture for such sale or to be consumed in the production of goods or services. Acceptable methods for cost measurement, such as retail inventory method, are alike under both US GAAP and IFRS. supplementary, under both sets of standards, the cost of inventory consists of all direct expenditures to complete inventory for sale, together with allocable overhead, while selling costs are barred from the cost of inventories, as are most storage costs and general administrative costs.

Role of Inventory Accounting

By serving the organization to make better decisions, the accountants can help the public sector to adjust in a very positive way that delivers better value for the taxpayer's investment. It can also help to incentivize growth and to ensure that reforms are sustainable and effective in the long term, by guaranteeing that success is correctly recognized in both the formal and informal reward systems of the organization.

To say that they have an important role to play is an understatement. Finance is linked to most, if not all, of the key business procedures within the organization. It should be steering the stewardship and accountability systems that make sure that the organization is carrying out its business in a proper, ethical manner. It is critical that these basics are firmly laid. So frequently they are the litmus test by which public poise in the institution is either won or lost.

Finance should also be supplying the information, analysis and counseling to enable the organizations' service managers to operate efficiently. This goes further than the traditional preoccupation with plans - how much have we spent so far, how much do we have left to spend? It is about assisting the organization to better comprehend its own performance. That means making the links and understanding the relations between given inputs - the resources brought to bear - and the production and outcomes that they attain. It is also about understanding and actively managing risks within the business and its activities.

Inventory Financial Accounting

An organization's inventory can appear as mixed blessings, since it adds up as an asset on the balance sheet, but it also ties up money that could serve for other reasons and requires additional expense for its protection. Inventory may also cause important tax expenses, depending on particular countries' laws regarding downgrading of inventory, as in Thor Power Tool Company v. Commissioner.

Inventory appears as a current asset on an organization's balance sheet because the organization can, in principle, rotate it into cash by selling it. Some organizations hold bigger inventories than their functions require in order inflating their obvious asset value and their perceived profitability.

additionally to the money tied up by obtaining inventory, inventory also brings associated costs for warehouse space, for utilities, and for insurance to cover up staff to handle and defend it from fire and other catastrophes, obsolescence, shrinkage (theft and errors), and others. Such holding costs can accumulate up: between a third and a half of its attainment value per year.

Businesses that stock too minute inventory cannot take advantage of great orders from customers if they cannot deliver. The contradictory objectives of cost control and customer service time and again pit an organization's financial and operating managers in opposition to its sales and marketing departments. Salespeople, particularly, often collect sales-commission payments, so unavailable commodities may reduce their potential personal income. This conflict can be reduced by reducing production time to being near or less than customers' expected delivery time.

Inventory costing methods

Under IAS 2, specific credentials must be in work to cost inventory that is not generally interchangeable, and commodities and services produced and set aside for specific projects. For inventories meeting either of these criterions, the exact identification method is compulsory and alternative methods cannot be used.

Specific identification is generally not a realistic technique, as the product will in general lose its separate identity as it passes through the manufacture and sales process. Exceptions to this would in general be restricted to those situations where there are small inventory quantities, typically having high unit value and a low return rate.

Because of the inadequate applicability of specific identification, it is more probable to be the case that certain assumptions concerning the cost flows linked with inventory will need to be made. One of accounting's peculiarities is that these cost flows may or may not replicate the physical flow of inventory.

Over the years, much consideration has been given to both the flow of physical commodities and the assumed flow of costs associated with those goods. In most influence, it has long been renowned that the flow of costs need not echo the actual flow of the goods with which those costs are linked.

Under the recent IFRS on inventories, revised IAS 2, there are two suitable cost flow assumptions. These are:

First-in, first-out (FIFO) method

The weighted-average method

There are variation of each of these cost flow hypothesis that are sometimes used in practice, but if an entity presents its financial statements under IFRS it has to be cautious not to apply a variant of these cost flow assumptions that would stand for a deviation from the food of IAS 2.

Moreover, in certain jurisdictions, other price methods, such as the last-in, first-out (LIFO) technique and the base stock method, maintain to be acceptable. The LIFO method was an allowed substitute method of costing inventories under IAS 2 until the revision that became successful in 2005, at which time it was prohibited.

Certain essential jurisdictions such as the US still permit the use of the LIFO method, and since use of LIFO for tax purposes requires use for financial reporting, the elimination of LIFO in the US is a controversial topic and may delay full convergence with IFRS.

First-In, First-Out (FIFO) Method

The FIFO method of inventory valuation presumes that the first goods acquired will be the first goods to be used or sold, in spite of the actual physical flow. This system is thought to parallel most closely the physical flow of the units for most industries having moderate to rapid turnover of goods.

The power of this cost flow postulation lies in the inventory amount reported in the statement of financial position. Because the earliest merchandise purchased are the first ones detached from the inventory account, the remaining balance is composed of items obtained closer to period end, at more up to date costs. This yields results related to those obtained under current cost accounting in the statement of financial position, and assists in achieving the aim of reporting assets at amounts approximating up to date values.

Nonetheless, the FIFO method does not automatically reflect the most accurate or decision-relevant income figure when envisioned from the viewpoint of underlying economic performance, as older historical expenditure are being matched against existing revenues.

Depending on the rate of inventory returns and the rate with which general and specific prices are shifting, this mismatching could potentially have a material distorting effect on reported income. At the great, if reported earnings are fully dispersed to owners as dividends, the enterprise could be left without enough resources to refill its inventory stocks due to the impact of changing prices.

This setback is not limited to inventory costing; depreciation based on old costs of plant assets also may belittle the true economic cost of capital asset utilization, and serve to support dividend distributions that leave the entity unable to restore plant assets at recent prices.

Weighted-Average Cost Method

The other appropriate method of inventory valuation under revised IAS 2 entails averaging and is usually referred to as the weighted-average cost method. The cost of merchandise available for sale (beginning inventory and net purchases) is divided by the units available for sale to get a weighted-average unit cost. Ending inventory and cost of goods sold are then priced at this average cost.

Net Realizable Value

As declared in IAS 2, "Net realizable value is the anticipated selling price in the ordinary course of business less the expected costs of completion and the estimated costs necessary to make the sale."

The usefulness of an item of inventory is restricted to the amount to be realized from its ultimate sale; where the item's recorded cost exceeds this sum, IFRS requires that a loss be accepted for the difference. The logic for this requisite is twofold:

First, assets (in particular, recent assets such as inventory) should not be accounted at amounts that exceed net realizable value; and

Second, any decline in value in a time should be reported in that period's outcome of operations in order to attain proper matching with current period's revenues.

Were the inventory to be passed forward at an amount in surplus of net realizable value, the loss would be known on the ultimate sale in a following period. This would denote that a loss incurred in one period, when the value decline arose, would have been delayed to a different period, which would without a doubt be inconsistent with several key accounting concepts, as well as conservatism.

Revised IAS 2 states that guess of net realizable value should be useful on an item-by-item basis in most instances, though it makes an exception for those situations where there are collections of correlated products or similar items that can be correctly valued in the aggregate.

As a general principle, item-by-item evaluation of cost to net realizable value are necessary, lest unrealized "gains" on some items (i.e., where the net realizable values exceed historical costs) counteract the unrealized losses on other items, thereby dropping the net loss to be recognized.

Since recognition of unrealized increase in profit or loss is generally banned under GAAP, assessment of inventory declines on a grouped basis would be an indirect or "backdoor" machinery to recognize gains that should not be given such credit. Accordingly, the basic requirement is to apply the tests on an individual item basis.


Increasing globalization coupled with interrelated regulations maintain to put pressure on moving towards ordinary global accounting framework - International Financial Reporting Standards (IFRS). Presently, more than 100 countries use IFRS, so if your business objective include global development, it is critical to educate yourself about the impact of IFRS on your monetary reporting processes and business now. To gain a better perception of what IFRS means for your organization, we have geared up a series of comparisons dedicated to highlighting important differences between IFRS and U.S. generally accepted accounting principles (GAAP). This specific comparison focuses on the considerable differences between U.S. GAAP and IFRS when bookkeeping for inventory.