Inventory And Cost Of Goods Sold


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Currently under the US GAAP, when it comes to inventory costing, there is no specific requirement that all inventories that are similar in nature apply a consistent cost formula. Further, the US GAAP does not prohibit LIFO, that is, last in first out method. However, when it comes to IFRS, there is an explicit requirement that the same cost formula be utilized for all the inventories that may be taken to be similar in nature. IFRS also prohibit the use of LIFO method. It is important to note that companies shall have to move to other inventory costing methods such as the FIFO, that is, first in first out on the adoption IFRS provisions.

Lower of cost or market

Under the US GAAP, it is important to note that lower of cost or market offers the basis of carrying inventory. In this case, market is taken to be the replacement cost (current) provided that the market does not exceed the net realizable value and does not fall below the net realizable value decreased by normal sales margin. Under the IFRS, we have the inventory being carried at the lower of cost or net realizable value. It is important to note that here, the emphasis is on the most appropriate estimations of net amounts expected to be realized by inventories. It is also important to note that under the US GAAP, when it comes to reversal of inventory write-downs, inventory write-downs to the lower of cost or market bring about a cost basis that is irreversible. However, when it comes to IFRS, there is the reversal of impairment that were recognized previously.  However, when the reasons for the impairment are no longer in existence, the reversal is up to the amount of the original impairment loss (Walton 2009).

 Property, plant and equipment

When it comes to property, plant and equipment, it is important to note that as far as asset retirement obligations are concerned, we may have variations in the initial measurement because while US GAAP comes up with a fair measure value, IFRS does not. Under the IFRS therefore, we shall have more variability as a result of the adjustment of obligations in subsequent periods as well as the accretion of the same on discount rates that that are market based. Also, when it comes to depreciation, the US GAAP does not necessitate the component approach as far as depreciation is concerned. On the other hand, IFRS dictate that the depreciation of the various significant components of property, plant as well as equipment having economic lives which are different be done as well as be recorded separately.

Research and development

It is important to note that under the US GAAP, we have research and development costs expensed as incurred. This essentially means that internally generated intangible assets recognition is quite rare. However, it is important to note hat when it comes to US GAAP, there is the appliance of specific rules in a number of areas including but not limited to he treatment of costs when software is developed for sale or when software is developed for use internally. However, under the IFRS, we have the classification of intangible assets creation costs into research phase as well as development phase costs. On the satisfaction of the given criteria, we have the capitalization of costs at the development phase and the expensing of costs in the research phase.

 Intangible assets

It is important to note that under the IFRS, we could have significant changes as far as the recognition and measurement of intangible assets is concerned. For instance, the development costs capitalization is prohibited under the US GAAP though several exceptions exist. However, when it comes to IFRS, development costs can be capitalized on satisfying a given criteria. It is important to note that even in instances where the development costs capitalization is allowed under GAAP, i.e. as far as software development costs are concerned, we still have gaping differences between the US GAAP and the IFRS. Under GAAP, there are existing guidelines a far as the software development costs are concerned i.e. for internal or external purposes but when it comes to IFRS the capitalization principles remain the same irregardless of whether the intangible that is developed internally is for sale or internal use.

Contingent liabilities

When it comes to acquired contingencies, significant differences exist as far as the recognition of contingencies is concerned in both GAAP and the IFRS. Needles (2009) notes that as per the IFRS provisions, when it comes to acquisitions, the contingent liabilities of an acquiree must be recognized separately at the acquisition date provided that there is reliability as far as their fair value measurement is concerned. In the case of US GAAP, if it is possible to determine the fair value of the contingencies at the measurement period, then contingent liabilities can be recognized at fair value. It is important to note that when it comes to the disclosure of contingent liabilities, IFRS permit reduced disclosure if in an informed opinion, such a disclosure is considered to be prejudicial to the position of an entity in a dispute with a third party with an interest in the same. However, when it comes to the US GAAP, there are no provisions allowable as far as reduced disclosure is concerned.

Lease liabilities

It is important to note that when it comes to lease liabilities, classification of the same is different in both the US GAAP and the IFRS. Pounder (2009) notes that the difference in classification can have an impact on the reflection of a lease liability within an entity’s financial statements. Under US GAAP, land and building elements are basically accounted for as a single unit as far as lease liabilities are concerned. However, there is a deviation in this where of the total leased property fair value, land accounts for an excess of 25%. On the other hand, when it comes to IFRS, there is a separate consideration of land and building elements. However, in this case, the element of land must not be material.

Revenue recognition

When it comes to Revenue recognition, US GAAP dictates that revenue in such a case must be 1) earned and/or 2) realized or realizable. Under US GAAP therefore, revenue must therefore be recognized only after the transaction has taken place, hat is, after the exchange. When it comes to the IFRS, revenue recognition is founded on a probability of benefits of an economic nature flowing to the entity. However, for such recognition to take place, it must be possible to measure the revenues and costs reliably. The Tax Management Inc (2008) also notes that as far s revenue transactions are concerned under IFRS, such transactions can be brought out under four categories which are seen to be broad and all inclusive. These transactions include sale of goods, service rendering, construction contracts and lastly, other uses of the assets of the entity including loyalties etc.

Extraordinary items

Under the US GAAP, extraordinary items are brought out as being not only unusual but also infrequent in practice. In the case of IFRS, extraordinary items are prohibited. It is also important to note that when it comes to US GAAP, though extraordinary items are prohibited as under IFRS, US GAAP takes extraordinary items to include items which can be taken to be quite infrequent as well as largely unusual. One f the items that is treated as an extraordinary item under the US GAAP is negative goodwill. Such an item like negative goodwill in the case of US GAAP is allocated on a pro-rata basis so as to bring down the carrying amount of certain assets. Negative goodwill in the case of IFRS is recognized as an income after the purchase price allocation reassessment.

Interest revenue and interest expense

It is important to note that under the US GAA, interest revenue is derived by a multiplication of the effective interest rate with he amortized cost with an allowance deduction. However, when it comes to the IFRS, the basis of the determination of interest revenue is the effective interest rate that discounts the cash flows that are expected. When it comes to interest expanse, PricewaterhouseCoopers (September 2009) notes that the recognition as well s treatment of interest expense is largely the same in both the US GAAP as well as IFRS. In both cases, interest expense is recognized on an accrual basis and in a situation where such an expense includes a debt instrument premium or discount; the effective interest rate model should be used to amortize the same.



 PricewaterhouseCoopers (September 2009). IFRS and US GAAP similarities and

Differences. Retrieved from

Tax Management Inc. U.S. GAAP to IFRS: issues and considerations. Tax Management, 2008

Walton P. An Executive’s Guide for Moving from US GAAP to IFRS. Business Expert Press, 2009

Needles, B.E. International Financial Reporting Standards. Cengage Learning, 2009

Pounder, B. Convergence Guidebook for Corporate Financial Reporting. John Wiley and Sons, 2009

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