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US GAAP vs. IFRS: the basics, March 2010 - Inventory - Ernst & Young - United States

US GAAP vs. IFRS: the basics, March 2010

Inventory

Similarities

ASC 330 Inventory (formerly ARB 43 Chapter 4) and IAS 2 Inventories are based on the principle that the primary basis of accounting for inventory is cost.

Both define inventory as assets held for sale in the ordinary course of business, in the process of production for such sale, or to be consumed in the production of goods or services. The permitted techniques for cost measurement, such as standard cost method or retail method, are similar under both US GAAP and IFRS.

Further, under both GAAPs the cost of inventory includes all direct expenditures to ready inventory for sale, including allocable overhead, while selling costs are excluded from the cost of inventories, as are most storage costs and general administrative costs.

Significant differences


US GAAPIFRS
Costing methodsLIFO is an acceptable method. Consistent cost formula for all inventories similar in nature is not explicitly required.LIFO is prohibited. Same cost formula must be applied to all inventories similar in nature or use to the entity.
MeasurementInventory is carried at the lower of cost or market. Market is defined as current replacement cost as long as market is not greater than net realizable value (estimated selling price less reasonable costs of completion and sale) and is not less than net realizable value reduced by a normal sales margin.Inventory is carried at the lower of cost or net realizable value (best estimate of the net amounts inventories are expected to realize. This amount may or may not equal fair value).
Reversal of inventory write-downsAny write-downs of inventory to the lower of cost or market create a new cost basis that subsequently cannot be reversed.Previously recognized impairment losses are reversed, up to the amount of the original impairment loss when the reasons for the impairment no longer exist.
Permanent inventory markdowns under the retail inventory method (RIM)Permanent markdowns do not affect the gross margins used in applying the RIM. Rather, such markdowns reduce the carrying cost of inventory to net realizable value, less an allowance for an approximately normal profit margin, which may be less than both original cost and net realizable value.Permanent markdowns affect the average gross margin used in applying RIM. Reduction of the carrying cost of inventory to below the lower of cost or net realizable value is not allowed.

Convergence

No further convergence is planned at this time.

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