Skip to content

CFA Level I · CFA Level I Exam · Analysis of Inventories

A company reporting under IFRS wrote inventory down to net realisable value last year. This year the selling price recovered, and NRV now exceeds the original cost. The most appropriate treatment is to:

The company should reverse the write-down fully, limited to the original cost, and recognise the gain in profit or loss, usually as a reduction of cost of sales. IFRS allows reversals but caps the carrying amount at cost. Prohibition of reversals is the US GAAP approach.

  1. Areverse the write-down in full, up to the original cost, with the gain recognised in profit or lossCorrect
  2. Breverse the write-down up to the new NRV and recognise the excess in other comprehensive income
  3. Cleave the carrying amount unchanged because reversals of write-downs are prohibited

Explanation

IFRS permits reversal of a prior write-down when NRV recovers, but only up to the original cost, so inventory is never carried above cost. The reversal reduces cost of sales in the period. Prohibiting reversals is the US GAAP position, and recognising amounts above cost in OCI is not allowed.

Did you get it right without looking?

One question tells you little. A timed set on Analysis of Inventories shows your real accuracy, how long you take and where you lose marks.

Practise Analysis of InventoriesFree diagnostic mock

More Analysis of Inventories questions