Inventory Valuation Analysis

I have chosen Nobes because there are more related articles and essays can be searched from the web, also the international accounting differences across the countries in accounting treatment is controversial issue nowadays. Differences reporting standard in accounting treatment across the countries can result in significantly different amounts being reported on the balance sheet and income statement. These differences will have impacts on cross country merger or acquisition and cross-border company comparison.

I have chosen the inventory valuation applied under UK (IFRS) and US (US GAAP) as different valuation method applied to inventories could lead to enhance comparability between countries. Also it will have impact on the reported income

Having different accounting standards in the world is a problem for multinational public limited companies and investors in order to be able to compare and evaluate financial statements (Doupnik & Perera, 2009). Due to the economic and financial scandals and meltdown in recent years, the pressure has been increased on some countries such as United States. Therefore, it must eliminate the gap between the International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP). The world of accounting diversity will have consequences on such changes, and the standard convergence of US GAAP with International Financial Reporting Standards also largely affect corporate management, investment, stock market, accounting personnel and accounting standard setters. In addition, the convergence of accounting standards will change the approach for international accounting harmonization to CPA and CFO, it affects the quality of international accounting quality standards and the effort made toward GAAP and IFRS convergence

Prohibition of the last-in, first-out inventory (LIFO) method by the IFRS has been always the center of the discussion. Related to this has been the significant difference between IFRS versus US GAAP regarding the application of the lower of cost or market (LCM) measurement and reporting of inventory.

US GAAP inventory rules are more conservative than IFRS inventory rules. There are four significant differences between US GAAP and IFRS.

 IFRS permits to use FIFO and weighted average method but LIFO is prohibited

 IFRS applies the lower of cost or net realizable value.

 Historical inventory “cost” is used in applying the lower of cost or net realizable value over the entire period that the inventory is held.

 Write-downs are reversed as selling prices rise.

Over the entire period of an enterprise, the amount of expense and profit are the same in the income statement on US GAAP and IFRS. However, the inventory and cost of goods sold balances can vary dramatically in any given period.

The LIFO Reserve

To overcome this issue, many companies maintain their internal records using FIFO, weighted average cost but external reporting using LIFO for income tax