In the United States, the Financial Accounting Standards Board (FASB) has been the organization that establishes standards that govern the preparation of financial statements, known as the United States Generally Accepted Accounting Principals (US GAAP). Many countries have established their own national accounting standards as well; however, as international business and trade increases, so does the need for a common set of accounting standards. In response to this need, the International Accounting Standards Board (IASB) was established with the purpose of developing a set of international accounting standards to increase the comparability of financial reporting globally. These standards are known as the International Financial Reporting Standards (IFRS). Although US GAAP and IFRS are comparable in some aspects, there are also some contrasting aspects. Under IFRS, the International Accounting Standard 2 (IAS 2) governs the accounting treatment for inventories. IAS 2 “provides guidance on the determination of the cost and subsequent recognition of expense (including write-down of inventory to its net realizable value). The Standard also provides guidance on the cost flow assumptions (“cost formulas”) that are to be used in assigning costs to inventories” (Mirza, Orrell and Holt). In addition, IAS 2 provides guidance on write-down reversals. IAS 2 applies to all inventories except work in process under construction contracts and work in process directly related to service contracts, which are governed by IAS 11, Construction Contracts; financial instruments, which are covered by IAS 32, Financial Instruments: Presentation; and biological assets related to agricultural activity and agricultural produce at the point of harvest, which are covered by IAS 41, Agriculture. According to IAS 2, the measure of the value of inventories is the lower of cost or net realizable value. Net realizable value “is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale” (iasb.org website). On the other hand, US GAAP measures the value of inventories at lower of cost price or current market value; however, in rare instances, fair value in excess of cost is allowed. Also, US GAAP does not have special rules regarding biological inventory, unlike IFRS. IAS 2 does not apply to the measurement of inventories that are “held by producers of agriculture and forest products, agricultural produce after harvest, and minerals and minerals products, to the extent that they are measured at net realizable value in accordance with best practices within those industries” (Mirza, Orrell and Holt). When the above mentioned inventories are measured at their net realizable value, any changes in value are then recognized in the profit or loss in the period in which the change occurred. Also, IAS 2 does not apply to the measurement of inventories that are “held by commodity brokers-traders who measure their inventories at fair value less cost to sell” (Mirza, Orrell and Holt). Again, any changes in value are recognized as profit or loss in the period of change. When it comes to accounting for inventories, the main concern is the amount of cost to be recognized as an asset. A company determines inventory cost under IFRS according to IAS 2; the cost is comprised of all costs of purchase, costs of conversion, and other costs that are “incurred in bringing the inventories to their present location and condition” (Mirza, Orrell and Holt). The cost of inventories under US GAAP is expressed vaguely, stating cost is “the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location” (Epstein, Nach and Bragg). The language, concerning inventory costs, used in the Wiley IFRS Guide is more explicit than the language used in the Wiley GAAP Guide. Furthermore, the Wiley GAAP Guide states that “this...
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