Question

What happens in a situation where a parent company and its subsidiary use different inventory costing methods? in both U.S. GAAP and IFRS

Answer 1

Inventories are based on the principle that the primary basis of the accounting for inventory is cost.

Under IFRS - Inventory method followed is FIFO, Special identification, or weighted average cost methods in valuating inventory cost. The LIFO method is not allowed under IFRS.

But, when compared to US GAAP, the inventory methods followed are Average cost method, LIFO and FIFO method can be used for evaluating inventory.

Under US GAAP inventory is recorded as the lesser of cost or market value but IFRS lays down different costing rules, It states that inventory is measured as the lesser of cost or net realizable value.

IFRS allows Reversal method and recognizes the same in the financial statement but GAAP doesn't allow the reversal method.

The subsidiary company maintains a separate set of books of account. If the inventory valuation differs then the problem comes when they consolidate the Financials statements of both parent and subsidiary company.