ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
(b) Inventory at cost = $245,000 + $500,000 = $745,000
Analysis
In this problem, one product’s market value is above cost and the
other one is below. From a conservative perspective, the individual
product approach results in a write–down for any product whose NRV
Principles
(a) If the NRV is $1,050, the value of commercial pumps would be above
cost. The written-down amount becomes the new cost for that
CODIFICATION EXERCISES
CE9.1
(a) According to the Master Glossary, Inventory is defined as the aggregate of those items of tangible
personal property that have any of the following characteristics:
1. Held for sale in the ordinary course of business
(b) According to the Master Glossary, the phrase lower-of-cost-or-market, the term market means
current replacement cost (by purchase or by reproduction, as the case may be) provided that it
meets both of the following conditions.
1. Market shall not exceed the net realizable value
Growing Crops
35-1 Costs of growing crops shall be accumulated until the time of harvest. Growing crops shall be
reported at the lower-of-cost-and net realizable value.
> Developing Animals
CE9.1 (Continued)
> Animals Available and Held for Sale
35.3 Animals held for sale shall be valued at either of the following:
(a) Using the guidance in Subtopic 330-10.
> Harvested Crops
35.4 Inventories of harvested crops shall be valued using the same criteria as animals held for sale in
CE9.2
According to FASB ASC 330-10-35: Adjustments to Lower-of-Cost-and net realizable value
A departure from the cost basis of pricing the inventory is required when the utility of the goods is no
longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the
ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence,
changes in price levels, or other causes, the difference shall be recognized as a loss of the current
period. This is generally accomplished by stating such goods at a lower level commonly designated as
CE9.2 (Continued)
In summary, the determination of the amount of the write-off should be based on factors that relate to
the net realizable value of the inventory, not the amount that will maximize the loss in the current
CE9.3
According to FASB ASC 330–10-35, if inventory has been the hedged item in a fair value hedge, the
inventory’s cost basis used in the lower–of-cost-or-market accounting shall reflect the effect of the
CE9.4
S99-1 The following is the text of Regulation S-X Rule 5-02, Balance Sheets.
The purpose of this rule is to indicate the various line items and certain additional disclosures
which, if applicable, and except as otherwise permitted by the Commission, should appear on
the face of the balance sheets or related notes filed for the persons to whom this article pertains
(see § 210.4–01(a)).
• ASSETS AND OTHER DEBITS
CE9.4 (Continued)
– (b) The basis of determining the amounts shall be stated.
If cost is used to determine any portion of the inventory amounts, the description of this method
shall include the nature of the cost elements included in inventory. Elements of cost include,
among other items, retained costs representing the excess of manufacturing or production costs
over the amounts charged to cost of sales or delivered or in-process units, initial tooling or other
deferred startup costs, or general and administrative costs.
– (c) If the LIFO inventory method is used, the excess of replacement or current cost over
stated LIFO value shall, if material, be stated parenthetically or in a note to the financial
statements.
– (d) For purposes of §§ 210.5–02.3 and 210.5–02.6, long-term contracts or programs include
• 1. all contracts or programs for which gross profits are recognized on a percentage–
– For all long-term contracts or programs, the following information, if applicable, shall be stated
in a note to the financial statements:
(i) The aggregate amount of manufacturing or production costs and any related deferred
costs (e.g., initial tooling costs) which exceeds the aggregate estimated cost of all in–
process and delivered units on the basis of the estimated average cost of all units
CODIFICATION RESEARCH CASE
(a) The codification provides guidance at: FASB ASC 330–10-05
(b) According to the FASB ASC 330-10-20, the Glossary indicates the
following.
Inventory is the aggregate of those items of tangible personal
property that have any of the following characteristics:
The term inventory embraces goods awaiting sale (the merchandise
of a trading concern and the finished goods of a manufacturer),
goods in the course of production (work in process), and goods to be
consumed directly or indirectly in production (raw materials and
supplies). This definition of inventories excludes long-term assets
subject to depreciation accounting, or goods which, when put into
CODIFICATION RESEARCH CASE (Continued)
(c) According to the FASB ASC 330–10-20, the Glossary indicates the
following for the term Market:
(d) According to FASB ASC 330-10–35:
35–15 Only in exceptional cases may inventories properly be stated
above cost. For example, precious metals having a fixed
50-3 Where goods are stated above cost this fact shall be fully
disclosed.
35–16 It is generally recognized that income accrues only at the time
of sale, and that gains may not be anticipated by reflecting
assets at their current sales prices. However, exceptions for
reflecting assets at selling prices are permissible for both of
the following:
a. Inventories of gold and silver, when there is an effective
IFRS CONCEPTS AND APPLICATION
IFRS9.1
Key similarities are (1) the guidelines on who owns the goods—goods in
transit, consigned goods, special sales agreements, and the costs to
include in inventory are essentially accounted for the same under IFRS and
Key differences are related to (1) the LIFO cost flow assumption—GAAP
permits the use of LIFO for inventory valuation. IFRS prohibits its use. FIFO
and average-cost are the only two acceptable cost flow assumptions
permitted under IFRS; (2) lower-of-cost-or-market test for inventory
valuation—IFRS defines market as net realizable value. GAAP uses NRV for
FIFO inventories. On the other hand, for LIFO and retail method
inventories, GAAP defines market as replacement cost subject to the
constraints of net realizable value (the ceiling) and net realizable value less
IFRS9.2
As shown in the analysis below, under IFRS, LaTour’s inventory turnover
ratio is computed as follows:
IFRS9.3
Reed must not be aware of the important convergence issue arising from
the use of the LIFO cost flow assumption; IFRS specifically prohibits its
use. Conversely, the LIFO cost flow assumption is widely used in the
IFRS9.4
(a) Biological assets are measured on initial recognition and at the end of
each reporting period at fair value less costs to sell (net realizable
value or NRV). Companies record a gain or loss due to changes in the
IFRS9.5
(1) $12.80 ($14.80 – $1.50 – $.50).
IFRS9.6
Item
Net
Realizable
Value
LCNRV
D
$80*
$75
E
62
62
G
35
35
H
40
36
IFRS9.7
(a)
12/31/20
Cost of Goods Sold …………………………..
24,000
24,000
12/31/21
Allowance to Reduce Inventory to
Net Realizable Value …………………………..
Cost of Goods Sold …………………………..
4,000
(b)
12/31/20
Loss Due to Decline of
Inventory to Net Realizable Value ………………………….
24,000
Allowance to Reduce Inventory
to Net Realizable Value …………………………..
24,000
12/31/21
Allowance to Reduce Inventory
to NRV ……………………………………………………….
4,000*
Recovery of Loss Inventory …………………………..
4,000
*Cost of inventory at 12/31/20 …………………………..
Recovery of previously recognized loss
= (a) – (b)
= $24,000 – $20,000
(c)
Both methods of recording lower-of-cost-or-NRV adjustments have
the same effect on net income.
IFRS9.8
Biological Assets – Shearing Sheep …………………
4,125*
IFRS9.9
(a)
Wool Inventory ……………………………………………….
9,000
Unrealized Holding Gain or
Loss – Income ……………………………………..
9,000
(b)
Cash ………………………………………………………………
Wool Inventory ……………………………………….
Sales Revenue ………………………………………..
IFRS9.10
(a) The IFRS requirements related to accounting and reporting for
inventories is found in IAS 2 (Inventories), IFRS 15 (Revenue) and IAS
41 (Agriculture).
IFRS9.10 (Continued)
(c) biological assets related to agricultural activity and agricultural
produce at the point of harvest (see IAS 41 Agriculture).
(IAS 2, paragraph 2)
(c) Net realisable value refers to the net amount that an entity expects to
(d) This Standard does not apply to the measurement of inventories held by:
(a) producers of agricultural and forest products, agricultural produce
after harvest, and minerals and mineral products, to the extent
IFRS9.11
(a) Inventories are valued on a weighted average cost basis and carried
at the lower of cost and net realisable value.
IFRS9.11 (Continued)
(d) The company had a gross profit of £4,087.8 in 2017 and £4,128.4 in
2016. Its gross profit rate in 2017 was 38.5% (£4,087.8 ÷ £10,622).
Its gross profit percentages for 2017 and 2016 are as follows:
2017
2016
Net sales ……………………….
£10,622.0
£10,555.4
Gross profit …………………..
Gross profit percentage ….