GAAP vs IFRS: Inventory
Mark Walker
Prof. Barndt
11/10
GAAP vs. IFRS: Inventory
There are many differences between the GAAP and the IFRS when it comes to recording inventory accounts. Since more and more businesses are communicating with international countries, this is becoming a bigger problem each day. The two sides are trying to figure out a system that both can agree on and follow. Even though there are many differences, they also share some similarities. If they continue to work together and come up with a solution, when the time comes to change, it will allow the transition to be much easier.
For many companies, inventory is a very large part of their assets and is an important part of their balance sheet (Inventory Valuation). Stockholders should start looking at a company’s inventory, because for some companies, it is their biggest asset. It is important to people who are trying to invest in a company to understand what inventory is and how inventory is determined. Inventory is valued in three different ways. The first method is First-In,First-Out approach, which is also called FIFO. The second method that companies are allowed to use is called the Last-In, First-Out approach, also called LIFO. The third and final method is called the Average Cost Approach. Companies need to find the best method for valuing their inventory so their business will attract investors.
Even though the GAAP and IFRS are having trouble coming up with a solution to this problem, each of the sides share a few similarities. The GAAP and IFRS both use the FIFO and average cost approaches to determine the value of their inventory on hand (Accounting for Inventory). The FIFO method is a good indicator of the value of ending inventory and it also raises net income for the year (Inventory Valuation). FIFO is a good indicator of ending inventory because the most recent units purchased are valued in the inventory. This method increases the net income because the prices usually tend to rise and the cost of goods sold is valued at the older inventory (Inventory Valuation). Since the cost of goods sold is lower, there is less to subtract from the revenues, leading to more profit for companies. Under the average cost approach, it takes, ” the weighted average of all units available for sale during the accounting period and then uses that average to determine the value of costs of goods sold and ending inventory” (Inventory Valuation). When companies in the United States and internationally use the same approach, it is easier for the stockholders to determine if the company is doing well enough to invest their money. Another similarity between the two is that they both present their inventories at lower cost or market. This means that if the value of their inventory were to plunge, the values would portray the market value or replacement costs instead of LIFO, FIFO, and average cost methods (Inventory Valuation).
The problems that the IFRS and GAAP are having are because of all the differences. One of the biggest differences is that the IFRS bans the LIFO cost method, while the GAAP offers FIFO, average cost, and LIFO (Accounting for Inventory). If prices rise, the LIFO method is not a good indicator of ending inventory value because the left over inventory that was “purchased more cheaply in the past is still sitting on the shelf” (Sucking LIFO Out of Inventory). Since the older units are the ones representing the value of inventory, the value may be lower than the most recent prices. Since the cost of goods sold is higher, there is more being taken away from a company’s revenue, leading to a lower profit. The IFRS considers their inventory costs on the order in which the products were sold, whereas, the U.S. GAAP considers their inventory cost at the time it was placed in inventory (Accounting for Inventory). This is a problem because the two boards recognize their costs at different time periods.
In my opinion, I think the GAAP has the best standards and rules when it comes to accounting for inventory. It allows companies to do what they feel is best, while the IFRS requires companies to do too many things. GAAP allows companies more options in valuing their inventory, whereas the IFRS has more restricted standards for valuing a companies’ inventory.
If the IFRS and GAAP do not work together and compromise with one another on solutions to their problems, there will be many difficulties when it comes to comparing companies from the United States and companies over seas. If they continue to work together, they will allow investors to be less confused and more confident in investing their money in different companies.
Works Cited
Epstein, Barry J., Dr. “Accounting for Inventory: IFRS versus GAAP.” IFRS vs.
GAAP. N.p., n.d. Web. 9 Mar. 2010.
“Inventory Accounting : Differences Between U.S. GAAP and International
Standards.” Financial Education. N.p., n.d. Web. 9 Mar. 2010.
Investopedia, Staff. “Inventory Valuation for Inventories: FIFO And LIFO.”
Investopedia. N.p., 2010. Web. 14 Mar. 2010.
Leone, Marie. “Sucking the LIFO Out of Inventory.” CFO. Magazine. 2010. 18 Sept. 2010
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About the Author:
My name is Mark Walker and I am a junior at West Chester University.
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