...Inventory Lower of Cost or Market Scene 1: Read the objectives for IFRS (IAS 2, paragraph 1) and US GAAP (ASC 330-10-10-1). * Based upon what is stated in these objectives, which set of standards is more concerned with the balance sheet presentation of inventories? Scene 2: * Do you think that the reversal of a write-down of inventory does a better job of accurately reflecting the information related to inventory on the balance sheet or on the income statement? * Is the fact that US GAAP disallows the reversal and IFRS allows the reversal consistent with the objectives? Scene 3: Currently, IFRS is more likely than US GAAP to report assets at fair value (e.g., property, plant and equipment can be revalued under IFRS, but not US GAAP.) * Is the IFRS requirement that prior inventory write-downs be reversed just a different way of saying that inventory should be reported at market value under IFRS? Scene 4: While neither IAS 2 nor ASC 330 provides the reasoning for why the reversal of inventory write-downs is allowed or not allowed, the issues surrounding long-lived asset impairments should be quite similar. Read the basis of conclusions under US GAAP (SFAS No. 144, paragraph B53) and under IFRS (IAS 36, paragraphs BCZ 182 through BCZ 186) that provide a discussion of the reasons the Boards made the decisions that they did. * What are the reasons that one might oppose reversals? What are the reasons that one might support reversals? Scene...
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...measurement of inventory? While there are areas of difference between the principles of the Codification and IAS 2, there are a substantial amount of similarities that promote a convergence of the two standards. Both are based on the principle that cost is the primary basis of accounting including costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Also, they contain similar definitions of inventory: Assets which (1) are held for sale in the ordinary course of business (2) are in the process of production for such sale, or (3) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Under the ASC 330-10-30, initial measurement cost formulas are: • Specific Identification • First-in, First-out (“FIFO”) • Weighted-Average Cost • Last-in, First-out (“LIFO”) Whereas IFRS does not allow the costing method use of last-in-first-out. Inventory is subsequently measured at the lower of cost or market (ASC 330-10-35). Market is defined as current replacement cost, which is limited to a ceiling of NRV, floor of NRV less normal profit margin. When a write-down occurs, a new cost basis is established. 2. What are the IAS 2 rules for the initial and subsequent measurement of inventory? Under IFRS, the initial measurement cost formulas are: • Specific Identification • First-in, First-out ("FIFO") • Weighted-Average Cost Inventory is subsequently...
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...consolidated financial statements of Nokia are prepared in accordance with IFRS, which are set by the IASB. The accounting for investment impairments is different from IFRS to GAAP. US GAAP does not permit the reversal of an impairment charge related to available-for-sale debt and equity investments, whereas IFRS allows reversals due to a subsequent recovery. Nokia reverses any increase in the fair value of investment in a subsequent period, and includes this reversal in the income statement. Another difference between the two reporting standards is in accounting for inventories. Under IFRS you cannot account for inventories using LIFO, whereas under GAAP you are permitted to use LIFO. Under GAAP inventories are valued at their Lower of Cost or Market, where Market is the replacement cost, limited to a “ceiling” and “floor”, and under IFRS inventories are stated at the Lower of Cost or Net Realizable Value, it does not use a ceiling or floor to determine Market. Under GAAP when inventory is written down using lower of cost or market, the new basis is considered its cost, therefore, inventory may not be written back up to its original cost in a subsequent period. Under IFRS, the write down may be reversed in a subsequent period up to the amount of the previous write down. Under IFRS a one-step approach is used to review for asset impairment. A fair value test is used to measure the impairment loss; it does not use the first-stage recoverability test used under GAAP – by comparing...
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...Accounting Standard (Ind AS) 2 Inventories Contents OBJECTIVE Paragraphs 1 SCOPE 2-5 DEFINITIONS 6-8 MEASUREMENT OF INVENTORIES Cost of inventories Costs of purchase 9-33 10-22 11 Costs of conversion 12-14 Other costs 15-18 Cost of inventories of a service provider 19 Cost of agricultural produce harvested from biological assets 20 Techniques for the measurement of cost 21-22 Cost formulas 23-27 Net realisable value 28-33 RECOGNITION AS AN EXPENSE 34-35 DISCLOSURE 36-39 APPENDICES A. References to matters contained in other Indian Accounting Standards 1. Comparison with IAS 2, Inventories Indian Accounting Standard (Ind AS) 2 Inventories (This Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles.) Objective 1. The objective of this Standard is to prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised. This Standard deals with the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. It also deals with the cost formulas that are used to assign costs to inventories. Scope 2. This Standard applies to all inventories, except: (a) (b) financial...
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...|FRAMEWORK | | |U.S. GAAP |IFRS |Similarities | |Purpose of Framework |The FASB framework resides lower in hierarchy. |Management is explicitly required to |Both the frameworks are similar in | | |Management is not required to prioritize it if no|prioritize the IASB framework if there is |their purpose to assist in developing| | |standard is available. |no standard or interpretation available. |and assisting standards. | |Objectives of |It provides different objectives for business |It gives one objective for different |Both frameworks have a broad focus to| |financial statement |entities versus non business entities. |business entities. |provide relevant information to a | | | | |wide range of users. | |Underlying assumptions|Although it recognizes, but not given much |Give importance to accrual and going | | | |prominence is given to accrual and going concern |concern basis...
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...IAS 2 International Accounting Standard 2 Inventories This version includes amendments resulting from IFRSs issued up to 17 January 2008. IAS 2 Inventories was issued by the International Accounting Standards Committee in December 1993. It replaced IAS 2 Valuation and Presentation of Inventories in the Context of the Historical Cost System (originally issued in October 1975). The Standing Interpretations Committee developed SIC-1 Consistency—Different Cost Formulas for Inventories, which was issued in December 1997. Limited amendments to IAS 2 were made in 1999 and 2000. In April 2001 the International Accounting Standards Board (IASB) resolved that all Standards and Interpretations issued under previous Constitutions continued to be applicable unless and until they were amended or withdrawn. In December 2003 the IASB issued a revised IAS 2, which also replaced SIC-1. IAS 2 was amended by IFRS 8 Operating Segments (issued November 2006). The following Interpretation refers to IAS 2: • SIC-32 Intangible Assets—Web Site Costs (issued March 2002 and subsequently amended). © IASCF 961 IAS 2 CONTENTS paragraphs INTRODUCTION IN1–IN17 INTERNATIONAL ACCOUNTING STANDARD 2 INVENTORIES OBJECTIVE SCOPE DEFINITIONS MEASUREMENT OF INVENTORIES Cost of inventories Costs of purchase Costs of conversion Other costs Cost of inventories of a service provider Cost of agricultural produce harvested from biological assets Techniques for the measurement of cost Cost formulas...
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...Mid semester Exam notes Topic 1 Function of accounting Decision Making * Investment – buy/sell shares, buy new shares offered by company * Lending – lend money to company in the form of bonds, loan conditions such as interest rates, security, other conditions Contracting – legally binding obligation that gives party the right to demand the performance of whatever promised * management (agency problem) – information asymmetry, act in self interest * debt Stewardship – compliance with delegated authority Agency Cost of equity Perquisite consumption – Manager give themselves more luxury than would seem reasonably from the principals point of view. E.g. corporate jets and huge officers with expensive art Risk aversion – managers and shareholders may prefer different levels of risk when it comes to project selection. Shareholders would generally prefer more risky investment because they are well diversified and know that any loss will be offset by another investment. Managers however are generally not as diverse, if the firm suffers a substantial loss, their salaries may be at risk, or it would be extremely difficult to find another job. Hence managers are usually more reluctant to take risk than the shareholders. Agency cost of debt Claim dilution – The value of existing debtholders’ claims can be diluted by the issue of additional debt of the same or higher priority. Asset substitution – If a firm sells debt for the stated purpose of investing in a low...
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...Analysis of IFRS and U.S. GAAP GAAP or acronym for Generally Accepted Accounting Principles refers to the standard framework of guidelines for financial accounting used in any given jurisdiction. It is a common set of accounting principles, standards, and procedures that companies use to compile their financial statements (Investopedia). For many years, countries have developed their own accounting standards. The U.S. has always followed the U.S. GAAP while most European countries followed the IFRS, or acronym for International Financial Reporting Standard. In a sense, the U.S. had their own financial “language”, and in order to communicate with others, they needed to translate to a language they could understand. As globalization and international trade increased, such differences in the financial language caused many difficulties and problems, creating a demand for a new language that is universally accepted and understood. The convergence of IFRS and GAAP is what came of this demand. Understanding U.S. GAAP and more importantly its transition to IFRS is extremely crucial for anyone pursuing a career in Accounting or related fields. At the time of the stock market crash in 1929, there was no structure setting accounting standards. As the nation plunged into the Great Depression, there were calls for increased government regulation of financial institutions. The result was the establishment of the Securities and Exchange Commission (SEC); a federal agency that administers...
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...Introduction International accounting standard No.2 (IAS2) "Inventory" gives the rules which should be followed during the recording and presentation of inventory. Inventory refers to goods which are held by a firm for sale, are in the production process or are materials which will be consumed in the production process or in giving out of services. This standard does not apply to financial instruments and it gives out a guideline on how to measure an asset which is categorized as an inventory, which concept constitute of the cost and at what time an expense occurs and the information that should be disclosed while preparing the financial statements (International Accounting Standards Board, 2008, p.977). History In the year 1974 during the draft of standard, the name was changed to "inventories" from "valuation and presentation of Inventories in the Context of the Historical Cost System" the first draft was affected on 1st of January in the year 1995 and this was 21 years after the first draft exposure. On 18th of December 2003, the standard was revised and took effect as from the strart of January 2005. In the year 2003, there was a revised IAS 2 whereby different cost formulas for inventories were incorporated into the standard. These were superseded from SIC 1 on consistency. On December 1997, SIC 1 was issued and was effective as from 1st January 1999. sic 1 required that that the same cost formula was to be used for inventories with the same characteristics under IAS 2.21 AND IAS...
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...To begin with, what is inventory valuation? Inventory valuation is the dollar amount of the merchandise within a company's inventory. Primarily, the price per unit is the cost to get the inventory items in place and ready for use. This notion is frequently complicated by the company’s failure to match actual cost flow with specific physical units (Gray & Ehoff Jr., 2014). What are the differences between U.S. GAAP and IFRS? U.S. GAAP allows numerous ways, such as retail method, to determine the cost of inventory. The three simple and most popular methods used include: 1) first-in, first-out (FIFO), 2) last-in, first-out (LIFO), and weighted average (Gray & Ehoff Jr., 2014). Once the cost is evaluated, the LCM rule is applied to the result to decide the monetary value to be stated in the financial reports. The LCM reflects a “conservative approach” by stating the expected current losses and deferring gains until these are recognized (Gray & Ehoff Jr., 2014). The U.S. GAAP in general tends to lean toward a safe approach, basically counting more on the certain facts and not relying on opinions or the uncertain. IFRS inventory rules are less conventional or cautious compared to US GAAP inventory rules, which I agree with the author on. There are four major differences between the US GAAP and the IFRS. First, IFRS permits the use of the FIFO and weighted average methods, but LIFO is not allowed (Gray & Ehoff Jr., 2014). Second, IFRS applies the lower of cost/net realizable value...
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...1. Accounts receivable and other receivables The company maintains provision for doubtful accounts for estimated losses resulting from the inability of its customers to make require payments, and such losses have been within management’s expectations. 2. Inventories a. Valuation. IFRS requires that inventory is carried at the lower of cost or net realizable value. Cost of the certain finished goods that are purchased for resale in relation to semiconductor repair services cannot be determined using the LIFO because the IFRS does not permit the use of LIFO. b. Impairment. IFRS requires reversal of inventory impairments in the period in which an impairment condition reverses (with the reversal limited to the amount of the original write-down). 3. Property, Plant, and Equipment a. Cost. After initial recognition, IFRS permits two measurement alternatives: at cost less accumulated depreciation; or, if fair value can be measured reliably, at a revalued amount that equals its fair value at the date of the revaluation less any subsequent accumulated depreciation. An entity must make an accounting policy choice to use either the cost model (that would be consistent with U.S. GAAP) or the revaluation model to measure each class of PP&E. The accounting policy that is selected must be applied to the entire class of PP&E. b. Depreciation. IFRS requires that each part of an item of PP&E with a cost that is significant in relation to the total cost of the item shall be depreciated...
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...Accounting for inventory under IFRS and U.S. GAAP ABSTRACT U.S. General Accepted Accounting Standards (U.S. GAAP) and International Financial Reported Standards (IFRS) both give guidance for inventory valuation. This study will give several examples, compare cost flow assumptions and inventory valuation under U.S. GAAP and IFRS, and indicate the possible influences to reported companies and financial information users. INTRODUCTION The U.S. Securities and Exchange Commission (SEC) continues to move forward in its proposed plans to replace U.S. GAAP for U.S. public companies with IFRS. Inventory valuation is important, because inventory is a crucial element not only in the computation of profit, but also in the valuation of assets for balance sheet purposes. Unfortunately, inventory values sometimes are manipulated by management in order to create a more favorable impression. In the following sections, I introduced several differences between U.S. GAAP and IFRS. I also analysis the possible reasons of information manipulation and influence. In section one and section two respectively I will talk about differences in cost flow assumptions and inventory valuation under both methods. I. COST FLOW ASSUMPTIONS Companies typically purchase merchandise at several different prices. Ending inventory equals the quantity on hand multiply the unit acquisition price. If a company use historical cost to determine the cost of inventory and it purchases inventory at different unit prices...
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...amount is to be included in profit or loss. Specifically, paragraph 88 of AASB 101 states: An entity shall recognise all items of income and expense in a period in profit or loss unless an Australian Accounting Standard requires or permits otherwise. As an example of one class of items that does not go to profit or loss we can consider the situation where an error from a prior period is discovered (perhaps the assets recorded last year were valued in excess of their recoverable value). In such a case the error is to be corrected retrospectively, as required by AASB 108 Accounting Policies, Changes in Accounting Estimates, and Errors. This would require a reduction in assets and a reduction in retained earnings to recognise the asset write-down expense. Although this is an expense that is recognised, it is a case of an expense being recognised directly in equity (retained earnings is an equity account). A number of other accounting standards also require certain income and expense items to be recorded directly in particular equity accounts rather than including them in a period’s profit or loss. These items form part of what is now referred to as ‘other comprehensive income for the year’—which when added to ‘profit or loss’ gives ‘total comprehensive income’ for the period. Paragraph 7 of AASB 101 defines ‘other comprehensive income’ as follows: Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in...
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...Conceptual Framework A conceptual framework establishes the concepts that underlie financial reporting. Conceptual framework includes objectives, qualitative characteristics, elements, measurement, and recognition concepts. The FASB Concepts Statements guide the board in developing accounting principles and provide understanding. These concept statements are non-authoritative and do not establish generally accepted accounting principles. Entities do not use the FASB Concept Statements in routine preparation of financial statements. (8,2) The IASB and the Interpretations Committee use conceptual framework when developing new or revised International Financial Reporting Standards (IFRS) and interpretations or when amending existing IFRSs. It is used as a point of reference to help preparers of financial statements in applying IFRSs or when no specific guidance is given. The IASB’s Conceptual Framework is not an International Financial Reporting Standard and does not override any specific IFRS. However, the Conceptual Framework is used in development of future standards and the IASB is reviewing IFRSs and the Conceptual Framework to eliminate all conflicts between them. (2,7) Basis of Accounting Both U.S. GAAP and IFRS use a modified historical cost basis with a growing emphasis on fair value when preparing financial statements. When non-U.S. entities operate in a highly inflationary environment and prepare GAAP financial statements; they have the choice to either report price-level...
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...CAPE COAST PLOYTECHNIC NAME: GABRIEL NMAI REG. NO: 021201226 COURSE: HND ACCOUNTANCY CLASS: ACCOUNTING 1B TITTLE: PRINCIPLES OF FINANCIAL ACCOUNTING ASSIGNMENT RESEARCH QUESTION EXAMINE THE PROVISIONS AND PRINCIPLES OF INTERNATIONAL ACCOUNTING STANDARD 1 (IAS 1) What is IAS 1? The International Accounting Standards Board (IASB) provides a conceptual framework for the preparation and presentation of financial statements. This currently consists of: 30 standards (IAS 1 – IAS 41) and 11 interpretations (SIC 7 – SIC 32). IAS-1: Presentation of Financial Statement Paragraph 7 of IAS -1 states that general purpose financial statements are those intended to meet the needs of users who are not in a position to demand reports that are tailored to their particular information needs. Paragraph10 of IAS -1 gives the complete list of these general purpose financial statements as follows: • A statement of financial position at the end of the period; • A statement of comprehensive income for the period; • A statement of changes in equity for the period; • A statement of cash flows for the period; • Notes, comprising a summary of significant accounting policies and other explanatory information; Elements of Financial Statements: According to the Paragraph 9 of IAS-1, the financial statements provide information about the following information about the entity’s : Assets Liabilities Equity Income and expenses Contribution by and distribution...
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