U.S. GAAP v. IFRS: The Basics - Financial Executives International


U.S. GAAP v. IFRS: The Basics - Financial Executives International



ARB 4 and IAS 2 (both entitled Inventories) are both 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 margin method, are similar under both U.S. 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


Costing methods LIFO is an acceptable method. Consistent

cost formula for all inventories similar in

nature is not explicitly required.

Measurement Inventory 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.

Reversal of inventory



Any write-downs of inventory to the lower of

cost or market create a new cost basis that

subsequently cannot be reversed.

LIFO is prohibited. Same cost formula must be

applied to all inventories similar in nature or

use to the entity.

Inventory is carried at the lower of cost or net

realizable value (best estimate of the amounts

inventories are expected to realize, taking

into consideration the purpose for which the

inventory is held. This amount may or may not

equal fair value).

Previously recognized impairment losses are

reversed, up to the amount of the original

impairment loss when the reasons for the

impairment no longer exist.

In November 2004, the FASB issued FAS 151 Inventory Costs to address a narrow difference

between U.S. GAAP and IFRS related to the accounting for inventory costs, in particular, abnormal

amounts of idle facility expense, freight, handling costs, and spoilage. At present, there are no other

convergence efforts with respect to inventory in process.


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