Inventory Accounting Essay
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1. Inventory costs:
The use of LIFO for determining inventory costs under International Accounting Standards is prohibited, while it is permitted under US GAAP.
2. Reversal of inventory write downs:
Under IAS, it is required if certain criteria are met whereas US GAAP strictly prohibits it.
3. Basis of Inventory valuation:
Under IAS, the inventory is carried at the lower of cost or net realizable value (NRV).
Under US GAAP, Carried at the lower of cost and market (market is the lower of replacement cost and NRV minus normal profit margin).
4. Whether the costs of idle capacity and spoilage can be included in inventory
Under IAS, it is prohibited.
Under US GAAP, it is permitted.
The change to IAS will avoid the biggest disadvantage of US GAAP that is; it permits LIFO to be used for inventory valuation where the oldest inventory costs are assigned to the inventory account which, when prices are changing can result in an inventory value that does not reflect the true current value.
Also, in case of shift to IAS, US companies will not be able to show lower profits by using LIFO when prices are rising. US GAAP helped the companies to reduce their payment of taxes.
Under US GAAP, extraordinary items are permitted but restricted to infrequent, unusual and rare items that affect profit and loss. However, it is prohibited under IAS.
Thus, extraordinary items give companies somewhat of a “hall pass” with the markets, allowing them to sometimes report lower earnings but get credit for higher earnings. Obviously, it is tempting for companies to try to report every bad thing that happens as an extraordinary item. This can be avoided once IAS is in place.
IAS is more comprehensive and clear. It would avoid misinterpretation by the companies.