Question

explain how a material adjustment to inventory due to application of the lower of cost or net realizable value rule should be reported in the financial statements. how would this reporting be beneficial to the users of the financial statements?

Answer 1

IAS 2 Inventories deals with requirements related to valuation of inventories. The standard requires inventories to be measured at the lower of cost and net realisable value (NRV).

NRV is the estimated selling price of the goods, less the estimated cost of completion.

As per IAS 2, Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. Any reversal need to be recognised in the income statement in the period in which the reversal occurs.

Disclosure Requirements:

• accounting policy for inventories
• carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The classifications depend on what is appropriate for the entity
• carrying amount of any inventories carried at fair value less costs to sell
• amount of any write-down of inventories recognised as an expense in the period
• amount of any reversal of a write-down to NRV and the circumstances that led to such reversal
• carrying amount of inventories pledged as security for liabilities
• cost of inventories recognised as expense (cost of goods sold).

Benefits of reporting to users:

Users of financial statement will be able to find out reasons for adjustement in inventory.

Also any material deviation will affect profit and loss of the Company. User will be able to understand corresponding impact on profit and loss of the Company.