inven_wbn_outs_et Title page Inventories» What's Behind the Numbers?» Cost Outflows» Express Video

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1 Title page Inventories» What's Behind the Numbers?» Cost Outflows» Express Video

2 Agenda Scenic: Cost of Sales and Inventories Basics IFRS and US GAAP Introduction Cost methods Permissible IFRS methods Measurement FIFO and weighted average Perpetual and periodic systems US GAAP Measurement LIFO LIFO reserve Entries LIFO tax savings Scenic: LIFO Liquidations and LIFO Reserve Reversals US GAAP LIFO liquidations LIFO reserve reversals Scenic: Inventory Impairments IFRS US GAAP

3 Introduction: cost methods Definition Cost methods determine how cost inflows associated with purchasing or producing inventories are assigned to cost of goods sold. Thus, cost methods determine inventory cost outflows. Common cost methods FIFO First-in-First-Out: The first costs to flow into inventory are the first to flow out through cost of sales. LIFO Last-in-First-Out: The last costs to flow into inventory are the first to flow out through cost of sales. Weighted average: The costs that flow out of inventory through cost of sales are the average costs of units available when sales occur. Unit purchase prices are weighted by the number of units purchased in determining the weighted average unit costs. Permissible IFRS cost methods FIFO Weighted average

4 Measurement: FIFO and weighted average inven_wbn_outs_et

5 Measurement: perpetual and periodic inventory systems Perpetual Inventory Systems Cost of sales is determined each time there is a sale based on prior purchases and sales on that date. Periodic Inventory Systems Cost of sales is determined at the end of the period. Periodic systems treat all sales as if they occurred at the end of the period and thus after all purchases. Comparisons FIFO cost of sales and inventories are the same under both systems because FIFO orderings are not affected by updating cost of sales during the period. Weighted average cost of sales and inventories generally differ for perpetual and periodic systems because weighted averages are affected by updating cost of sales. When input prices are increasing, periodic weighted average cost of sales will be larger than perpetual weighted average cost of sales. Similarly, periodic ending inventories based on weighted average costing will be smaller than perpetual ending inventories.

6 US GAAP: measurement: LIFO Reserve inven_wbn_outs_et

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8 US GAAP: entries inven_wbn_outs_et

9 US GAAP: LIFO tax savings The LIFO reserve at each balance sheet date represents the cumulative excess costs recognized using LIFO rather than FIFO prior to that date. Thus, the LIFO reserve represents the cumulative pretax income that has escaped taxes by using LIFO rather than FIFO. Accordingly, the tax savings from using LIFO is the LIFO reserve multiplied by the tax rate, assuming a constant tax rate.

10 US GAAP: LIFO liquidations LIFO layers are added during reporting periods when the number of units sold is less than the number produced or purchased. LIFO layers are partially or fully liquidated during reporting periods when the number of units sold exceeds the number of units produced or purchased. As a result, costs from previous periods are assigned to cost of sales, which decreases LIFO layers recorded in previous years. Synonyms LIFO layer eliminations, LIFO layer decrements

11 US GAAP: LIFO reserve reversals LIFO reserve reversals are decreases in the LIFO reserve that often occur when LIFO layers are liquidated. However, LIFO layers can be liquidated without LIFO reserve reversals and LIFO reserve reversals can occur without LIFO liquidations. LIFO reserve reversals have the opposite effect on LIFO-FIFO comparisons to LIFO reserve increases. For example, FIFO cost of sales is greater than LIFO cost of sales and LIFO tax expense is greater than FIFO tax expense.

12 Impairments: IFRS Lower of Cost or Net Realizable Value (LCNRV) Under IFRS, Inventory is stated at the lower of cost or net realizable value, where cost is determined using FIFO or weighted average and net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Paragraphs 6 and 25, IASB 2 LCNRV Impairments Inventory is impaired or written down when its net realizable value is less than its cost. The impairment is the excess of the cost over the net realizable value. Impairment Reversals Under IFRS, inventory impairments can be reversed when the conditions that gave rise to them no longer exist or there is evidence of an increase in net realizable value. However, inventory can t be stated above its preimpairment cost. Paragraphs 33, IASB 2

13 Impairments: US GAAP Inventories are impaired or written down when their market values are less than their cost, where costs are typically based on LIFO, FIFO, weighted average, or a variation of these methods and market is: Replacement cost, providing the replacement cost is less than the net realizable value and greater than the net realizable value less a normal profit. Net realizable value if the replacement cost is greater than the net realizable value. Net realizable value less a normal profit when the replacement cost is less than the net realizable value less a normal profit. Impairments aren t reversed under US GAAP.

14 Take aways What should you know? IFRS and US GAAP Inventory cost methods determine how costs are assigned to cost of goods sold. The three most common cost methods are FIFO, weighted average, and LIFO, but LIFO is not permitted under IFRS. Perpetual and periodic inventory systems are two ways to record the cost of sold goods to inventories. Perpetual cost of sales is determined each time there is a sale based on prior purchases and sales on that date. Periodic cost of sales is determined at the end of the period. US GAAP LIFO cost of sales differ under perpetual and periodic systems. LIFO reserves connect LIFO and FIFO measures IFRS Inventory is reported at the lower of cost or net realizable value US GAAP Inventory is reported at the lower of cost or market