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Agenda
IFRS and US GAAP


Introduction

Cost methods

Permissible IFRS methods
Measurement

Perpetual systems

Periodic systems
US GAAP

Measurement

LIFO

Entries

LIFO and FIFO pretax income

LIFO tax savings


Outsiders

What do they see?

What can they derive?
Company disclosures

Caterpillar

LIFO reserve and LIFO and FIFO inventories

LIFO and FIFO income statements
IFRS and US GAAP

Take-aways
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Introduction: cost methods definition
Definition
Cost methods determine how cost inflows associated with
purchasing or producing inventories are assigned to cost of
goods sold.
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Introduction: common cost methods
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Introduction: Permissible IFRS cost methods
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Measurement: perpetual inventory system ─ defining feature
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Measurement: periodic inventory system ─ defining feature
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FIFO perpetual versus periodic
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Weighted average perpetual versus periodic
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US GAAP: Measurement: LIFO perpetual versus periodic
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US GAAP: Measurement: LIFO layers ─ insider uses layers to get from FIFO to LIFO
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US GAAP: Entries: Determining measures to be recorded
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US GAAP: Entries: BSE
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US GAAP: Income before taxes: LIFO versus FIFO
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US GAAP: LIFO tax savings
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US GAAP: Outsiders: What insider information do outsiders see?
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US GAAP: Outsiders: What can outsiders determine?
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US GAAP: Caterpillar: LIFO Reserve and LIFO and FIFO inventories
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US GAAP: FIFO and LIFO income statements
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US GAAP: Caterpillar: Cumulative LIFO Tax Savings
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Take-aways
What should you know?
IFRS and US GAAP

Perpetual and periodic inventory systems are two ways to
record the cost of sold goods to inventories:

In perpetual systems, cost of sales is updated each time there is a
sale.

In periodic systems, cost of sales is updated at the end of each
reporting period.

FIFO cost of sales and ending inventories is the same under
perpetual and periodic systems because the FIFO ordering is not
affected by updating cost of sales during the period.

Weighted average cost of sales and ending inventories generally
do differ for perpetual and periodic systems because weighted
average costs are affected by updating cost of sales.
US GAAP

LIFO cost of sales and ending inventories generally do differ
for perpetual and periodic systems because LIFO orderings
are affected by updating cost of sales.

Differences in LIFO cost of sales and inventories between
perpetual and periodic systems are likely considerably
smaller for most companies than differences between LIFO
and FIFO cost of sales and inventories.

LIFO layers are the building blocks behind LIFO inventories:

New LIFO layers are added to inventories during periods when
companies acquire or produce more units than they sell.

Old LIFO layers are eliminated (liquidated or decremented) during
periods when companies sell more units than they acquire or
produce.

Older LIFO layers have lower unit costs when input prices are
increasing and these layers can stay in inventories indefinitely. As
a result, LIFO inventories can be valued much lower than they
would be at replacement costs.
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

LIFO reserves connect LIFO and FIFO measures at balance
sheet dates:

FIFO inventory equals LIFO inventory plus the LIFO reserve

Cumulative FIFO pretax income to date equals cumulative LIFO
pretax income plus the LIFO reserve

Cumulative FIFO tax expense to date equals cumulative LIFO tax
expense plus the tax rate multiplied by the LIFO reserve

Cumulative FIFO net income to date equals cumulative LIFO net
income plus the LIFO reserve multiplied by one minus the tax rate

FIFO retained earnings equals LIFO retained earnings plus the
LIFO reserve multiplied by one minus the tax rate

Cumulative LIFO tax savings to date equals the LIFO reserve
multiplied by the tax rate
The increase in the LFO reserve during a reporting period
connects LIFO and FIFO period measures:

FIFO cost of sales equals LIFO cost of sales less the increase in
the LIFO reserve

FIFO gross margin equals LIFO gross margin plus the increase in
the LIFO reserve

FIFO pretax income equals LIFO pretax income plus the increase
in the LIFO reserve

FIFO tax expense equals LIFO tax expense plus the increase in
the LIFO reserve multiplied by the tax rate

FIFO net income equals LIFO net income plus the increase in the
LIFO reserve multiplied by one minus the tax rate
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Take-aways
Where are we heading?
IFRS and US GAAP

The other scenic routes in this module examine the
measurement and record keeping issues behind two topics
often discussed in companies footnotes:

The income consequences of liquidating LIFO layers (US GAAP
only)

The income statement and balance sheet consequences of
inventory impairments based on the lower of cost or market
valuation rule.

The How Do You Use the Numbers module demonstrates
how the concepts in this module facilitate comparisons across
LIFO and FIFO companies.

We will be adding modules in the future that will examine
inventory issues we overlooked here to simplify the
discussion:

In the Ran Sui’s Trendy Tops (RSTT) example, we assume the
number of units in ending inventory is known precisely and equals
the beginning units plus units purchased during the period less
units sold. In practice, other factors such as theft and deterioration
affect the actual number of units in ending inventories.
Companies frequently conduct physical counts to determine the
precise units at the count date.

When physical counts are too costly or not possible, companies
can estimate cost of sales and thus ending inventory using either
the retail method or gross profit method, which will be discussed
in a future module.
US GAAP

RSTT had one product, which may have led you to incorrectly
conclude companies perform separate LIFO and FIFO derivations
for each product. Instead, they combine similar products into
pools and use average input prices to estimate unit costs. The
dollar-value-LIFO method, which will be discussed in future
modules, treats inventory as quantities of value rather than
quantities of units and forms pools according to comparable
economic characteristics rather than comparable physical
characteristics.
IFRS and US GAAP

Learning these refinements will enhance your understanding
of inventory disclosures. Still, the concepts covered here are
all you need to know to interpret them in broad terms and to
adjust measures so they are comparable across companies.
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