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Writing-Down Inventory

14 July 2010 0 views 3 Comments

When it is possible to establish an allowance for writing down inventory and when it isn’t?

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  • ifrslist
    ifrslist said:

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    # 14 July 2010 at 3:34 am
  • patriciawalters said:

    My assumption is that you mean when would a company use a valuation allowance account (contra asset) in which it would record write-downs or reversals of write-downs of inventory rather than record the write-down directly to the relevant inventory sub-account for the particular goods that are impaired.

    If that is your meaning of the word “allowance”, my answer would be that I believe valuation allowance accounts are particular useful devices for maintaining information about the cost of the inventory and its net realizable value (cost less the valuation allowance). I believe it is more efficient to use valuation allowances when reversals of write-downs are permitted (as in IFRS).

    IFRS doesn’t prohibit the use of valuation allowance for inventory, so I believe you could use one whenever you wanted.

    Conversely, since IFRS doesn’t required a valuation allowance in this case, either, you don’t have to use one if you don’t want to.

    The choice is yours. Regardless, the carrying amount of inventory on the balance sheet will be its net realizable value.

    Several companies use allowances for obsolescence. See Note 6, Inventories, in the 2009 AR of Arcelor-Mittal.

    Regards
    Patricia Walters

    # 14 July 2010 at 9:27 pm
  • stl1231 said:

    IAS 2 provides guidance on accounting for inventory. Inventory is carried at the lower of cost or its net realizable value (defined as 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). If the inventories’ net realizable value has fallen below its cost, the inventory should be measured at the net realizable value (NRV). Although an allowance is not specifically required, in practice (especially for internal accounting purposes) an allowance is normally used (but not necessarily reported in the underlying financial statements). This practice is prudent in tracking the NRV and the potential for future recoveries should there be changes in conditions that led to the decline in NRV. Example of indicators of a possible decline in NRV below cost is a decline in the sales price of a product which could be related to competitors entering the market, decline in demand, or litigation of similar products.

    # 25 July 2010 at 3:13 pm

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