Question

Answer each of the following questions related to international accounting standards.

1.Explain how the accounting for items and costs making up merchandise inventory is different between IFRS and U.S. GAAP.

2. Can companies reporting under IFRS apply a cost flow assumption in assigning costs to inventory? If yes, identify at least two acceptable cost flow assumptions.

3. Both IFRS and U.S. GAAP apply the lower of cost or market method for reporting inventory values. If inventory is written down from applying the lower of cost or market method, explain in general terms how IFRS and U.S. GAAP differ in accounting for any subsequent period reversal of that reported decline in inventory value.

Short answer

1.

Points of difference	U.S GAAP	IFRS
Methods	FIFO, LIFO, Weighted Average method, and Specific identification.	FIFO, weighted average, and specific identification.
Reversal of write-downs	Not allowed	Allowed

2. Two acceptable cost flow assumptions under IFRS are:

a. FIFO.

b. Weighted average.

3. Reversing the written-down value of the inventory is only allowed under IFRS and not under U.S GAAP.

Step-by-step solution

Difference between the accounting for items and cost making up under IFRS and U.S. GAAP

Definition of U.S GAAP

The accounting principles that are followed by the business entities operating in U.S for reporting their business transactions in the books of accounts are known as U.S GAAP.

Points of difference	U.S GAAP	IFRS
Methods	U.S GAAP allows a business entity to use FIFO, LIFO, Weighted average, and Specific identification methods for inventory valuation.	The LIFO method cannot be used under IFRS. It allows the use of FIFO, Weighted average, and specific identification.
Reversal of write-downs	It does not allow to reverse of the value of the inventory written down under LCM for the subsequent increase in their value.	It allows a business entity to record the reversal because of an increase in the value of the inventory previously written down under LCM.

Cost flow assumptions under IFRS

The assumption states that the cost of inventory changes from the time when it is acquired to the time when it is sold is known as the inventory cost flow assumption.

FIFO: Under the FIFO method of cost flow assumption, it is assumed that the units of inventory that were acquired initially are sold out first, or firstly the cost of the oldest inventory will be allocated to the cost of goods sold.

Weighted Average: Under this method of cost flow assumption, the business entity calculates the average price per unit by considering the cost of goods available for sale and units available for sale. This average price per unit is used to allocate the cost of goods sold.

LCM under U.S GAAP and IFRS

The accounting rules that are applied to make the financial statements consistent, transparent, and comparable are known as IFRS (International financial reporting standards).

Accounting under U.S GAAP: U.S GAAP does not allow to make the reversal of the written-down value of the inventory in the future period when the value of inventory increases.

Accounting under IFRS: IFRS allows a business entity to reverse the value of inventory written down in a future period when the value of inventory increases.