A company holds inventory of interchangeable commodity units and is deciding on a cost-flow assumption. Its reporting policy requires strict compliance with IFRS Standards as issued by the IASB, with no US GAAP options available. Which cost-flow assumption is unavailable to this company solely because of that policy, even though it remains a widely used method for entities reporting only under US GAAP?
- Last-in, first-out (LIFO), which IAS 2 prohibits while ASC 330 permits it
- First-in, first-out (FIFO), which both frameworks permit without restriction
- Weighted-average cost, which both frameworks permit without restriction
- Specific identification, which both frameworks permit for non-interchangeable items
Why A? And why not the others?
Correct answer: A. Last-in, first-out (LIFO), which IAS 2 prohibits while ASC 330 permits it
IAS 2 explicitly prohibits the use of last-in, first-out as a cost formula for inventory, while ASC 330 in US GAAP continues to permit it, making this the correct choice and the clearest cost-flow difference between the two frameworks. The option describing first-in, first-out is wrong because IAS 2 and ASC 330 both permit it as an acceptable cost formula, so it is not a point of divergence. The option describing weighted-average cost is wrong for the same reason: both frameworks accept it as one of the standard cost formulas for interchangeable inventory. The option describing specific identification is wrong because both frameworks require or permit it for inventory items that are not ordinarily interchangeable, or that are produced and segregated for specific projects, so there is no restriction unique to either framework there. The LIFO prohibition under IFRS is a long-standing, deliberate divergence rather than an oversight, and it is one of the most frequently tested US GAAP vs IFRS inventory differences precisely because it can create materially different cost of goods sold and ending inventory figures during periods of changing prices.
Source: IFRS Foundation, IAS 2 Inventories (cost formulas, prohibiting LIFO); FASB Accounting Standards Codification ASC 330 Inventory (permitting LIFO)