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Agenda
Scenic: Cost of Sales and Inventories Basics
IFRS and US GAAP


Introduction

Cost methods

Permissible IFRS methods
Measurement

FIFO and weighted average

Perpetual and periodic systems
US GAAP

Measurement

LIFO

LIFO reserve

Entries

LIFO tax savings
Scenic: LIFO Liquidations and LIFO Reserve Reversals
US GAAP

LIFO liquidations

LIFO reserve reversals
Scenic: Inventory Impairments
IFRS
US GAAP
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Introduction: cost methods
Definition
Cost methods determine how cost inflows associated with
purchasing or producing inventories are assigned to cost of goods
sold.
Thus, cost methods determine inventory cost outflows.
Common cost methods

FIFO ─ First-in-First-Out: The first costs to flow into inventory
are the first to flow out through cost of sales.

LIFO ─ Last-in-First-Out: The last costs to flow into inventory
are the first to flow out through cost of sales.

Weighted average: The costs that flow out of inventory through
cost of sales are the average costs of units available when sales
occur.
Unit purchase prices are weighted by the number of units
purchased in determining the weighted average unit costs.
Permissible IFRS cost methods

FIFO

Weighted average
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Measurement: FIFO and weighted average
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Measurement: perpetual and periodic inventory systems
Perpetual Inventory Systems

Cost of sales is determined each time there is a sale based on prior
purchases and sales on that date.
Periodic Inventory Systems

Cost of sales is determined at the end of the period.
Periodic systems treat all sales as if they occurred at the end of the
period and thus after all purchases.
Comparisons

FIFO cost of sales and inventories are the same under both systems
because FIFO orderings are not affected by updating cost of sales
during the period.

Weighted average cost of sales and inventories generally differ for
perpetual and periodic systems because weighted averages are
affected by updating cost of sales.

When input prices are increasing, periodic weighted average cost of
sales will be larger than perpetual weighted average cost of sales.

Similarly, periodic ending inventories based on weighted average
costing will be smaller than perpetual ending inventories.
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US GAAP: measurement: LIFO Reserve
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US GAAP: entries
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US GAAP: LIFO tax savings

The LIFO reserve at each balance sheet date represents the
cumulative excess costs recognized using LIFO rather than FIFO
prior to that date.

Thus, the LIFO reserve represents the cumulative pretax income that
has escaped taxes by using LIFO rather than FIFO.

Accordingly, the tax savings from using LIFO is the LIFO reserve
multiplied by the tax rate, assuming a constant tax rate.
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US GAAP: LIFO liquidations

LIFO layers are added during reporting periods when the number of
units sold is less than the number produced or purchased.

LIFO layers are partially or fully liquidated during reporting periods
when the number of units sold exceeds the number of units produced
or purchased.

As a result, costs from previous periods are assigned to cost of sales,
which decreases LIFO layers recorded in previous years.
Synonyms
LIFO layer eliminations, LIFO layer decrements
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US GAAP: LIFO reserve reversals

LIFO reserve reversals are decreases in the LIFO reserve that often
occur when LIFO layers are liquidated. However, LIFO layers can be
liquidated without LIFO reserve reversals and LIFO reserve reversals
can occur without LIFO liquidations.

LIFO reserve reversals have the opposite effect on LIFO-FIFO
comparisons to LIFO reserve increases. For example, FIFO cost of
sales is greater than LIFO cost of sales and LIFO tax expense is
greater than FIFO tax expense.
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Impairments: IFRS
Lower of Cost or Net Realizable Value (LCNRV)
Under IFRS, Inventory is stated at the lower of cost or net realizable value, where
cost is determined using FIFO or weighted average and net realizable value is
the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale.
Paragraphs 6 and 25, IASB 2
LCNRV Impairments
Inventory is impaired or written down when its net realizable value is less
than its cost. The impairment is the excess of the cost over the net
realizable value.
Impairment Reversals
Under IFRS, inventory impairments can be reversed when the conditions
that gave rise to them no longer exist or there is evidence of an increase
in net realizable value. However, inventory can’t be stated above its preimpairment cost.
Paragraphs 33, IASB 2
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Impairments: US GAAP


Inventories are impaired or written down when their market
values are less than their cost, where costs are typically
based on LIFO, FIFO, weighted average, or a variation of
these methods and market is:

Replacement cost, providing the replacement cost is less than the
net realizable value and greater than the net realizable value less
a normal profit.

Net realizable value if the replacement cost is greater than the net
realizable value.

Net realizable value less a normal profit when the replacement
cost is less than the net realizable value less a normal profit.
Impairments aren’t reversed under US GAAP.
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Take aways
What should you know?
IFRS and US GAAP

Inventory cost methods determine how costs are assigned to cost of
goods sold.

The three most common cost methods are FIFO, weighted average,
and LIFO, but LIFO is not permitted under IFRS.

Perpetual and periodic inventory systems are two ways to record the
cost of sold goods to inventories.

Perpetual cost of sales is determined each time there is a sale
based on prior purchases and sales on that date.

Periodic cost of sales is determined at the end of the period.
US GAAP

LIFO cost of sales differ under perpetual and periodic systems.

LIFO reserves connect LIFO and FIFO measures
IFRS

Inventory is reported at the lower of cost or net realizable value
US GAAP

Inventory is reported at the lower of cost or market
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