Chapter 3 Compare between GAAP & IFRS (1) Inventory ras2 Basis of Valuation: Lower of Cost or Market: (ssl) jms) 3) ( AalSall) il Logals Jaa IFRS : International Financial Reporting Standards ashgall Lal! Gsaacll jules Net realizable value = Selling price - cost to sell (to complete) Cost: given v7 Fifo W.A GNI aus Cost & Market ox oi WF GAAP: Generally Accepted Accounting Principles Ugg Gi jlekall dylan! juleall Market : 1) Replacement Cost "given" 2) Ceilling (upper limit) = Net Realizable Value 3) Floor ( Lower Limit ) = Net Realizable Value - normal profit (Ch x Selng Price) Cost: given Market ) 8 busy! 4sfll yoUN Fifo Lifo W.A GNI Jessy Cost & Market ox oti WZExample(1): 14. To determine the amount at which inventory should be reported on the December 31, Year 1 balance sheet, Monroe Company compiles the following information for its inventory of Product Z on hand at that date: t@ HISHOFIGEM COST 2 5 et cies os ofel= et « -fnele)aie ais ie)e oe oln)elei= ieigile ela ios <1) $20,000 * Replacement cost . 14,000 * Estimated selling price. 17,000 ‘* Estimated costs to complete and sell...........-- 2,000 20% * Normal profit margin as a percentage of selling pnice . The entire inventory of Product Z that was on hand at December 31, Year 1 was completed in Year 2 at a cost of $1,800 and sold at a price of $17,150. Required: a. Determine the impact that Product Z has on income in Year 1 and Year 2 under (1) IFRS and (2) U.S. GAAP. b. Summarize the difference in income, total assets, and total stockholders’ equity using the two different sets of accounting rules over the two-year period.WA rFRs: * Cost 20,000 « Net Realizable Value (Market) Selling price 17,000 (-) Cost to sell (2000) 15,000 « Inventory Loss 5000 ventory writedown loss 5000 inventory 5000 Income Statement Balance sheet Inventory Loss 5,000 Inventory 15,000 WA u.s GAAP * Cost 20,000 e Market: « Net Realizable Value 15,000 + Net Realizable Value -Normal Profit 11,600 (15,000 - 17,000x20%) + Replacement Cost 14,000 14,000 e Inventory Loss 6000 inventory writedown loss 6000 inventory 6000 Income Statement Balance sheet Inventory Loss 6,000 Inventory 14,000Year 2: IFRS U.S GAAP Price $ 17,150 $ 17,150 Product cost 15,000 14,000 + Cost to completed 1,800 1,800 = Cost of Goods Sold $ 16,800 $ 15,800 = Gross Profit $ 350 $ 1,350 a Year (1) : IFRS has higher income than U.S GAAP Year (1): U.S GAAP has higher income than IFRS b Year 1: TERS result in $1,000 larger income before tax, assets, and stockholders’ equity. Year 2: IFRS result in $1,000 smaller income before tax; assets'and stockholders’ equity US GAAP & IFRS are the same at the’end of Year 2 under both IFRS and U.S. GAAP.15. Example (2): Beech Corporation has three finished products (related to three different product lines) in its ending inventory at December 31, 2020 . The following table provides additional information about each product: 7 Replacement Normal Profit Product Cost Cost Selling Price Margin 101 $130 $140 $160 20% 202 $160 $135 $140 20% 303 $100 $ 80 $100 15% Beech Corporation expects to incur selling costs equal to 5 percent of the sell- ing price on each of the products... Required: Determine the amount. at which Beech should report its inventory on the December 31, Year 1 balance sheet under (1) IFRS and (2) US. GAAP.Under IFRS : Market : Net realizable Value = Selling price - cost to sell Selling Selling Cost NRV Price — | (5% of selling (selling price - Product cost Price) | ‘selling cost) | LCM 101 $130 $160 $8 $152 $130 202 $160 $140 $7 $133 $133 303 $100 $100 $5 $95 $95 Ttem-by-item $390 $358 total Cost LCNRV Loss = 390 - 358 = 32 —» write-down Inventory loss 32 Inventory 32Under U.S GAAP NPM selling] NRV | profit Kear ipa Product cost | RC | Price Margin | price) |(floor)| market} LCM 101 $130 | $140 | $160 | $152 | 20% | $32 | $120] $140 | $130 202 $160 | $135 | $140 | $133 | 20% | $28 | $105 | $133 | $133 303 $100 | $80 | $100) $95 15% | $15 | $80 $80 | $80 Total $390 $343 | $343 Cost LCNRV 390 - 343 = 47 —> write-down Inventory Loss = Inventory loss inventory 47 47Example (2) (le 44S Example (3): 16:: This is a continuation of problem 15. At December 31,2021 , Beech Corpora- tion still had the same three different products in its inventory. The following table provides updated information for the company’s products: Replacement Normal Profit Product Cost Cost Selling Price Margin 101 $130 $180 $190 20% 202 $160 $150 $160 20% 303 $100 $100 $130 15% Beech Corporation still expects to incur selling costs equal to 5 percent of the selling price. Required: Determine the amount at which Beech should report its inventory on the ‘December 31, Year 2 balance sheet under (1) IFRS and (2) U.S. GAAP.Year 2021 Under IFRS : Carrying Selling | Selling Amount. price costs NRV LCNRV Product 12/31/2020| Cost |12/31/2021| _(5%)_| 12/31/2021 | 12/31/2021 101 ‘$130 | $130 $190 f-) $9.50/= $180.50, $130.00 - oa 202 133 | $160 $160 > $8006 $152.00 162.00 | - e 303 95 | S100 $130 fo $6.50 [= 1512350 | 100,00 3358 [$390 $382.00 Recovery : Carrying amount , 2020 $ 358 Lom , 2021 $ 382 $ 24 21} Gil) aad Inventory 24 Loss Reversal 2410 Year 2021 Under U.S GAAP NRV-(selling price x % ) ————————— A I new Ceiling Floor Product Cost RC (NRV) Nev-Np Market Cost LCM 101 130 180 180.5 180.5-(190x20%)-142.5 180 130 130 202 133 150 152 152-(160x20%)=120 150 160 150 303 80 100 123.5 123.5-(130x15%)=104 199 ©=100-—Ss:100 38, "390-380 Carrying amount , 2020 $ 343 LCM , 2021 $ 380 $ 37 Ol} Obl dad @ No inventory Loss because LCM (2021) $380 exceed book value $ 343 @ Loss Reversal : is not Premitted under U.S GAAP (Recognized)