CAPITULO 9 INTERMEDIA - Chapter 9 Inventories Additional...

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CHAPTER 9 INVENTORIES: ADDITIONAL VALUATION ISSUES This IFRS Supplement provides expanded discussions of accounting guidance under International Financial Reporting Standards (IFRS) for the topics in Intermediate Accounting. The discussions are organized according to the chapters in Intermediate Accounting (13 th or 14 th Editions) and therefore can be used to supplement the U.S. GAAP requirements as presented in the textbook. Assignment material is provided for each supplement chapter, which can be used to assess and reinforce student understanding of IFRS. LOWER-OF-COST-OR-NET REALIZABLE VALUE (LCNRV) Inventories are recorded at their cost. However, if inventory declines in value below its original cost, a major departure from the historical cost principle occurs. Whatever the reason for a decline—obsolescence, price-level changes, or damaged goods—a company should write down the inventory to net realizable value to report this loss. A company abandons the historical cost principle when the future utility (revenue-producing ability) of the asset drops below its original cost. Net Realizable Value Recall that cost is the acquisition price of inventory computed using one of the historical cost-based methods—specific identification, average cost, or FIFO. The term net real- izable value (NRV) refers to the net amount that a company expects to realize from the sale of inventory. Specifically, net realizable value is the estimated selling price in the normal course of business less estimated costs to complete and estimated costs to make a sale. [1] To illustrate, assume that Mander Corp. has unfinished inventory with a cost of $950, a sales value of $1,000, estimated cost of completion of $50, and estimated selling costs of $200. Mander’s net realizable value is computed as follows. Inventory value—unfinished $1,000 Less: Estimated cost of completion $ 50 Estimated cost to sell 200 250 Net realizable value $ 750 Mander reports inventory on its statement of financial position at $750. In its income statement, Mander reports a Loss on Inventory Write-Down of $200 ($950 2 $750). A departure from cost is justified because inventories should not be reported at amounts higher than their expected realization from sale or use. In addition, a company like Mander should charge the loss of utility against revenues in the period in which the loss occurs, not in the period of sale. Companies therefore report their inventories at the lower-of-cost-or-net realizable value (LCNRV) at each reporting date. Illustration 9-2 shows how two companies indicate measurement at LCNRV. Illustration of LCNRV As indicated, a company values inventory at LCNRV. A company estimates net realizable value based on the most reliable evidence of the inventories’ realizable ILLUSTRATION 9-1 Computation of Net Realizable Value Chapter 9 Inventories: Additional Valuation Issues · 9–1
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As indicated, the final inventory value of $384,000 equals the sum of the LCNRV for each of the inventory items. That is, Regner applies the LCNRV rule to each indi- vidual type of food.
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CAPITULO 9 INTERMEDIA - Chapter 9 Inventories Additional...

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