US GAAP is a generally accepted accounting principle in the United States. US GAAP is issued by the Financial Accounting Standards Board [FASB] and adopted by the US Securities and Exchange Commission [SEC]. IFRS is the international reporting standard promulgated by the International Accounting Standards Board [IASB]. The use of IFRS in more than 100 countries is the main reason why the US Securities and Exchange Commission intends to move from US GAAP to IFRS, but progress has been slow. There are similarities between the frameworks, but there are some fundamental differences between the two accounting standards.
Specifically, comparing inventory accounting standards, US GAAP and IFRS are based on similar principles. For both, inventory is defined as an asset held for sale in the ordinary course of business, used to sell assets in the production process, or materials or supplies consumed in the production or service of the inventory. Similarly, they all rely on cost as the primary basis for inventory accounting.
The first difference is the inventory cost calculation method for use and application. US GAAP allows the use of last in, first out [LIFO] costing methods. First come, first served estimates of assets that are first produced or acquired are assets that are first used, sold or disposed of. This means that the latest inventory first appeared. International Financial Reporting Standards prohibit the use of the LIFO inventory cost method. US GAAP and IFRS use first-in, first-out [FIFO] and weighted average costs. FIFO is another asset management and valuation method used at home and abroad. Assets that are first produced or acquired are first sold, used or disposed of. Assume that assets that remain in inventory at the end of the accounting period correspond to assets that were recently produced or purchased. The weighted average cost calculation method uses the average of the cost of goods by calculating the total cost of the items in the inventory and dividing that amount by the total number of units available for sale. The inventory cost generated by the weighted average method is between LIFO and the cost determined by the FIFO. Regarding the application of different costing methods, US GAAP does not require the same method to determine the cost of having similar properties and all inventory for an entity. In contrast, IFRS requires the same method to determine the cost of inventory applied to all stocks that have properties and uses similar to the entity. The additional accounting method for determining inventory costs, LIFO, and the ability to apply different costing methods to different inventory is the first difference between US and international standards when considering inventory.
The second difference is how each framework measures value. US GAAP uses a lower cost or lower market approach, while IFRS uses a lower cost or net realizable value method. A lower cost or market cost means that at the end of the accounting period, the quantity reported by the inventory is the cost or value of the inventory in the market, ie the lower quantity. The lower cost or net realizable value method uses a lower number between the cost or net realizable value, which is the amount the company expects to receive from inventory sales. The net present value is calculated by calculating the estimated selling price and subtracting the estimated cost from the completed and estimated cost of sales.
The third difference is the reversal of write-downs. US GAAP prohibits the withdrawal of write-downs, but according to IFRS, the remaining recycling needs. Write-down is a reduction in the book value of inventory because it is overvalued compared to the market. This can happen if the book value of the inventory may not be reasonable for fair value and the illegal inventory can be sold at cost or book value. For US GAAP, write-downs to reduce the book value of inventory to reduce costs or markets cannot be reversed, resulting in increased value. On the other hand, if the value of the inventory increases, IFRS requires that the write-down be revoked to reduce the book value of the inventory to a lower cost or net present value. IFRS limits reversal to the original write-down amount.
Costing methods and applications, the measurement of book value and the reversal of write-downs are three significant differences in inventory accounting between US GAAP and IFRS. If the program is to develop internationally, an entity should be educated of all the differences in accounting standards between US GAAP and IFRS.
Orignal From: Inventory Accounting: US Generally Accepted Accounting Principles and International Financial Reporting Standards
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