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

A company wrote inventory down to net realisable value in the prior year. In the current year, the selling price recovers and NRV now exceeds the original cost. Under IFRS, the company is most likely to:

The company reverses the write-down only up to the original cost. IFRS permits reversals when net realisable value recovers, but inventory cannot be carried above cost, so gains beyond cost are not recognised. Prohibiting reversals is the US GAAP treatment, not IFRS.

  1. AKeep the written-down carrying amount until the inventory is sold
  2. BReverse the write-down up to the original costCorrect
  3. CReverse the write-down up to the new, higher net realisable value

Explanation

IFRS allows reversal of an inventory write-down when NRV recovers, but the reversal is limited so the carrying amount does not exceed the original cost. Reversing to the higher NRV would recognise unrealised gains. Keeping the written-down value is the US GAAP approach, which prohibits reversals.

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