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Comparison of GAAP and IFRS in Inventory Valuation

This article discusses the differences between US GAAP and IFRS in inventory valuation methods, costing assumptions, measurement, required disclosures, and potential problems. It also analyzes the audit problems associated with both standards and provides insights into which valuation method is better.

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Comparison of GAAP and IFRS in Inventory Valuation

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  1. Inventories- US Generally Accepted Accounting Principles (GAAP) vs. International Financial Reporting Standards (IFRS) Julia Makarieva Jennifer Waclawik Becky Fay Grayson Schrantz Alex Perez

  2. Definition of Inventory

  3. Applies to:

  4. Costs Included in Inventory

  5. Costing Methods (Cost Flow Assumptions)

  6. Measurement of Inventories

  7. Required Disclosures:

  8. Advantages and Disadvantages

  9. Potential Problems with Adopting IFRS • Problems Consist of the death of LIFO (Last In First Out) for the companies that used it for their inventory. • LIFO is widely used in the U.S, so that would cause a change for majority of companies here. • Affects their financial reporting. • Affects their taxation (required to change their taxing methods).

  10. Potential Problems with Adopting IFRS • Purpose of LIFO is to lower their income tax liability and to postpone paying taxes. • This would also reduce income for financial reporting purposes. • Using LIFO would cause a reduction in the taxable income. • Due to IFRS not allowing LIFO it would cause a switch to FIFO or Average Cost which would: • Increase inventory • Increase the current income taxes

  11. Audit Problems with IFRS • Where is the line drawn? • Consistency of Measurement • Reversal transactions • Allows multiple methods if identical • Consistency is key!! • Net realizable value

  12. Audit Problems with GAAP • Obsolete inventory • Potential solution • Bill and Hold scam • Good auditing • Potential solution

  13. Which is Better? The IFRS inventory valuation is a fairer valuation because it is not solely based on rules, but principles as well. It also provides increased comparability.

  14. Sources • http://ifrsusa.wordpress.com/2011/04/05/which-is-better-%E2%80%93-principles-or-rules/ • http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias2_en.pdf • www.csb.uncw.edu/people/rocknessj/classes/.../InventoryIFRS.ppt‎ • http://www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November_2012/$FILE/US_GAAP_v_IFRS_The_Basics_Nov2012.pdf • http://cpaclass.com/gaap-accounting-standards/codification-300/asc-codification-topic-330.htm • https://checkpoint.riag.com/app/view/previewDocNew?feature=tcheckpoint&lastCpReqId=4700635&preview=y&linkid=162&linkType=tlltype&DocID=iGAAPCD13%3A4822.1&pinpnt=cite&linkHght=destguid%3AiGAAPCD13%3A4882.1&SrcDocId=T0GAAPCD13%3A4882.1-1 • http://www.journalofaccountancy.com/Issues/1999/Oct/carmichl.htm • http://www.accountingtools.com/obsolete-inventory-accounting • http://www.thefreelibrary.com/Inventory+valuation+under+IFRS+and+GAAP%3A+this+article+is+based+on+a...-a0284451759

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