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Inventories: Key differences between U.S. GAAP and IFRSs

Under U.S. GAAP, ASC 330-10 is the primary source of guidance on accounting for inventories.

Under IFRSs, IAS 2, Inventories, is the primary source of guidance on accounting for inventories.

Both U.S. GAAP and IFRSs define inventories as assets that are (1) held for sale in the ordinary course of business, (2) used in the process of production for sale, or (3) materials or supplies to be consumed in the production of inventory or in the rendering of services.1 The cost of inventory under both U.S. GAAP and IFRSs generally includes direct expenditures of getting inventories ready for sale, including overhead and other costs attributable to the purchase or production of inventory.

IAS 2 includes specific scope exceptions for (1) inventories held by producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value in accordance with well-established practices in those industries, and (2) inventories of commodity broker-traders who measure their inventories at fair value less cost to sell. Under U.S. GAAP, similar guidance is provided in (1) ASC 905-330, which allows for measurement of inventories at net realizable value in certain circumstances in the agricultural industry; and (2) ASC 940-320-30-2 and ASC 946-10-15-2, which allow for measurement of certain inventories at fair market value in the financial services industry.

The table below summarizes these differences and is followed by a detailed explanation of each difference.2

SubjectU.S. GAAPIFRSs

Measurement of carrying value

Lower of cost or market.

Lower of cost or net realizable value.

Costing formula

The same formula used to determine the cost of inventory does not need to be applied to all inventories that have a similar nature and use to the entity.

The same formula used to determine the cost of inventory must be applied to all inventories that have a similar nature and use to the entity.

Asset retirement obligations (AROs)

An ARO that is created during the production of inventory is added to the carrying amount of the property, plant, and equipment used to produce the inventory.

An ARO that is created during the production of inventory is accounted for as a cost of the inventory in accordance with IAS 2 and may be added to the carrying amount of the inventory.

Accounting methods

First-in, first-out (FIFO); last-in, first-out (LIFO); weighted-average cost; and specific identification are acceptable accounting methods for determining cost of inventory.

FIFO and weighted-average cost are acceptable accounting methods for determining cost of inventory; LIFO is not permitted. The specific identification method is required for inventory items that are not ordinarily interchangeable and for goods or services produced and segregated for specific projects.

Reversal of write-downs

Write-downs taken to reduce inventories to the lower of cost or market may not be reversed for subsequent increases in value.

Write-downs taken to reduce inventories to the lower of cost or net realizable value are reversed for subsequent increases in value.

Measurement of Carrying Value

Although a lower-of-cost-or-market approach is used under U.S. GAAP to determine the carrying value of inventory, under IFRSs a lower-of-cost-or-net-realizable-value approach is used.

Under U.S. GAAP, the term market, as defined in ASC 330-10-20, states that "market" generally means current replacement cost, except that this replacement cost should not (1) exceed net realizable value or (2) be lower than net realizable value less a normal profit margin.

Similarly to U.S. GAAP, IFRSs define net realizable value as estimated selling price less estimated costs of completion and sale.

Example 1

Carrying value $ 100
Replacement cost 90
Net realizable value 95
Net realizable value less normal profit margin 80

Inventory would be recorded at $90 under U.S. GAAP and at $95 under IFRSs.

Example 2

Carrying value $ 100
Replacement cost 90
Net realizable value 105
Net realizable value less normal profit margin 95

Inventory would be recorded at $95 under U.S. GAAP and at $100 under IFRSs (i.e., no write-down is required).

Costing Formula

ASC 330-10-30-13 permits an entity to apply different costing formulas to different components of its inventory:

The business operations in some cases may be such as to make it desirable to apply one of the acceptable methods of determining cost to one portion of the inventory or components thereof and another of the acceptable methods to other portions of the inventory.

Paragraph 25 of IAS 2 requires that the same costing formula be used for all inventories with a similar nature and use to the entity. Paragraph 26 provides the following example:

For example, inventories used in one operating segment may have a use to the entity different from the same type of inventories used in another operating segment. However, a difference in geographical location of inventories (or in the respective tax rules), by itself, is not sufficient to justify the use of different cost formulas.

Asset Retirement Obligations (AROs)

Under U.S. GAAP, ASC 410-20-25-5 states, in part:

Upon initial recognition of a liability for an asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. [Emphasis added]

Conversely, paragraph 18 of IAS 16, Property, Plant and Equipment, states:

An entity applies IAS 2, Inventories, to the costs of obligations for dismantling, removing and restoring the site on which an item is located that are incurred during a particular period as a consequence of having used the item to produce inventories during that period. The obligations for costs accounted for in accordance with IAS 2 or IAS 16 are recognised and measured in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

In other words, IFRSs allow asset retirement obligation costs to be added to the carrying amount of the inventory in the period in which they are incurred. This is further discussed in paragraph BC15 of IAS 16, which states, in part:

The Board observed that accounting for these costs initially in accordance with IAS 2 acknowledges their nature. Furthermore, doing so achieves the same result as including these costs as an element of the cost of an item of property, plant and equipment, depreciating them over the production period just completed and identifying the depreciation charge as a cost to produce another asset (inventory), in which case the depreciation charge constitutes part of the cost of that other asset.

Accounting Methods

Under U.S. GAAP, ASC 330-10-30-9 states: Cost for inventory purposes may be determined under any one of several assumptions as to the flow of cost factors, such as first-in first-out (FIFO), average, and last-in first-out (LIFO). The major objective in selecting a method should be to choose the one which, under the circumstances, most clearly reflects periodic income.

Under IFRSs, paragraph 23 of IAS 2 requires the use of a specific identification inventory costing method for "items that are not ordinarily interchangeable and [for] goods or services produced and segregated for specific projects." For inventory items not covered by paragraph 23, paragraph 25 of IAS 2 specifically requires use of the FIFO or weighted-average cost method. LIFO is explicitly not permitted under IFRSs.

Reversal of Write-Downs

Under U.S. GAAP, the reversal of previously recognized write-downs of inventory is not allowed in subsequent periods.

Under IFRSs, any write-down of inventory to net realizable value is recognized as an expense in the period in which it occurs. Paragraph 33 of IAS 2 requires any subsequent increases in the net realizable value of inventory previously written-down to be recognized as a reduction of inventory expense in the period in which they occur (up to the amount of the original write-down).

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1 The term inventory is defined in ASC 330-10-20 and paragraph 6 of IAS 2.

2 Differences are based on comparison of authoritative literature under U.S. GAAP and IFRSs and do not necessarily include interpretations of such literature.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.