Question

Client X operates in the US currently and is planning to expand operations globally next year. As a result, management is considering preparing financial statements in accordance with IFRS rather than with US GAAP.

Client X contacted you for clarification and recommendations regarding the following issues:

1. How the use of the LIFO method to value its inventories will be impacted if a switch to financial statements prepared in compliance with IFRS will be made.

2. Whether interest cost on construction of a new warehouse may be included in the cost of the new warehouse.

3. In what instances should goodwill be adjusted for impairment?

Answer 1

1. LIFO (Last in First Out) method is permitted under US GAAP but it is prohibited under IFRS. As IFRS rules are based on principles rather than exact guidelines. usage of LIFO is prohibited due to potential distortions it can  have on a company’s profitability and financial statements. In principle, LIFO may create a distortion to net income when prices are rising (inflation).

2. As per IAS 23 "Borrowing Cost' :- Borrowing costs include interest on bank overdrafts and borrowings, finance charges on finance leases and exchange differences on foreign currency borrowings where they are regarded as an adjustment to interest costs. so borrowing cost of qualifying assets is part of Cost of qualifying assets.

Qualifying assets means assets or property which take substantial period of time to get ready for intended use. hence warehouse is the qualifying asset so interest cost would part of cost of new warehouse.

3. If, and only if, the recoverable amount of an Goodwill  is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.

An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard. ( Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard.