Question

Reed Pentak, a finance major, has been following globalization and made the following observation concerning accounting convergence: “I do not see many obstacles concerning development of a single accounting standard for inventories.” Prepare a response to Reed to explain the main obstacle to achieving convergence in the area of inventory accounting

Short answer

The main obstacles are related to the difference between the GAAP and IFRS for inventory valuation and reporting.

Step-by-step solution

Inventory accounting

Inventory accounting refers to the method used by business entities to measure the inventory and report the current value of the inventory.

Main obstacles

The main obstacles are as follows:

• IFRS and GAAP have a difference in the treatment of inventory valuation method, as IFRS is principle-based, whereas GAAP is guideline-based.
• Under GAAP, the LIFO method cannot be used for inventory valuation.
• LCNRV rule is permitted in IFRS with no restrictions related to LIFO/retail inventory.
• Net realizable value is used to record both biological assets under IFRS, which is not applicable in the case of GAAP.
• Inventories reported at LCNRV cannot be rerecorded at the original cost under GAAP. However, it can be reversed in the case of IFRS.

All the above differences in the GAAP and IFRS act as obstacles to achieving convergence in inventory accounting.