Following FASB's simplification of inventory measurement, most US GAAP entities using FIFO or average cost measure inventory at the lower of cost and net realizable value, matching the approach used under IAS 2 for all inventory. However, an entity using the LIFO cost-flow assumption continues to apply a different subsequent-measurement test under US GAAP. What is that different test, and how does it compare to the IFRS approach for the same entity's inventory?
- The entity measures LIFO inventory at fair value each period with changes taken to profit or loss; IAS 2 would require the same fair value approach
- The entity measures LIFO inventory at the lower of cost and net realizable value, identical to IAS 2, because the FASB simplification applied to all cost-flow assumptions without exception
- The entity is prohibited from measuring LIFO inventory below its original cost under any circumstances, while IAS 2 has no subsequent-measurement requirement at all
- The entity measures LIFO inventory at the lower of cost or market, where market is bounded by a replacement-cost-based ceiling and floor; IAS 2 would instead require lower of cost and net realizable value for that same inventory, with no replacement-cost ceiling or floor
Why D? And why not the others?
Correct answer: D. The entity measures LIFO inventory at the lower of cost or market, where market is bounded by a replacement-cost-based ceiling and floor; IAS 2 would instead require lower of cost and net realizable value for that same inventory, with no replacement-cost ceiling or floor
FASB's simplification of inventory guidance moved most US GAAP inventory measured under first-in, first-out or average cost to a lower-of-cost-and-net-realizable-value test, aligning that portion of US GAAP with the approach IAS 2 already applies to all inventory. That simplification explicitly carved out inventory measured using the last-in, first-out method or the retail inventory method, which continue to apply the older lower-of-cost-or-market test, under which market is defined as replacement cost, bounded by a ceiling equal to net realizable value and a floor equal to net realizable value less a normal profit margin. Because IAS 2 does not permit LIFO as a cost-flow assumption at all, an entity using LIFO under US GAAP would, if it reported the same inventory under IFRS, measure it using the ordinary lower-of-cost-and-net-realizable-value approach with no replacement-cost ceiling or floor concept involved. The option describing a fair-value-through-profit-or-loss approach is wrong because neither framework measures inventory at fair value in this way; both use a lower-of-cost-based test. The option claiming the FASB simplification applied without exception to all cost-flow assumptions is wrong because the simplification specifically excluded LIFO and retail-method inventory, leaving the older test in place for them. The option describing an absolute prohibition on writing inventory below cost, and no IAS 2 subsequent-measurement rule at all, is wrong because both frameworks require inventory to be written down when its recoverable value falls below cost.
Source: FASB Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory (lower of cost and net realizable value, excluding LIFO and retail-method inventory); IFRS Foundation, IAS 2 Inventories, paragraphs 9 and 25-27 (lower of cost and net realizable value; LIFO prohibited)