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

Compared with a company that reports under IFRS, a company reporting under US GAAP and using FIFO that records an inventory write-down would most likely:

Under US GAAP the company cannot reverse the write-down, because the written-down amount becomes the new cost basis of the inventory. This contrasts with IFRS, which allows reversals up to original cost. The write-down itself is recognised in profit or loss, not other comprehensive income.

  1. Abe required to reverse the write-down when market conditions improve
  2. Bbe unable to reverse the write-down, so the written-down value becomes the new cost basisCorrect
  3. Creport the written-down amount in other comprehensive income

Explanation

Under US GAAP, a write-down to the lower of cost and NRV establishes a new cost basis, and later recoveries cannot be reversed. IFRS permits reversal up to original cost. Write-downs go through profit or loss, not OCI.

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