How do inventory write-downs work under IFRS vs US GAAP, and can they be reversed?

Inventory write-downs ensure that inventory is not carried at more than its recoverable value. But the rules differ between IFRS and US GAAP.

IFRS: Lower of Cost and Net Realizable Value (LCNRV)

• NRV = Estimated selling price - Estimated costs to complete and sell
• Write down inventory to NRV if cost exceeds NRV
• Reversals are permitted (up to original cost) if NRV subsequently increases

US GAAP: Lower of Cost or Market (LCM)

• Market = Replacement cost, but bounded by:
• Ceiling: NRV (selling price - costs to complete/sell)
• Floor: NRV - Normal profit margin
• Write down to this "market" value
• Reversals are NOT permitted (except for LIFO/retail method users transitioning)

Example -- Oakmont Electronics:

Product X has a cost of $100 per unit.

Under IFRS:

NRV = $110 - $15 = $95

Since cost ($100) > NRV ($95), write down by $5 to $95.

Under US GAAP:

NRV (ceiling) = $110 - $15 = $95

NRV - Normal profit (floor) = $95 - $20 = $75

Replacement cost = $82 (between floor and ceiling, so Market = $82)

Since cost ($100) > Market ($82), write down by $18 to $82.

Reversal Scenario (IFRS only):

Next quarter, selling prices recover and NRV rises to $105. Under IFRS, Oakmont reverses the write-down back to original cost ($100), recognizing a $5 gain. Under US GAAP, no reversal is allowed -- the carrying value stays at $82.

Financial Statement Impact of Write-Downs:

• COGS increases (or a separate write-down expense)
• Inventory on the balance sheet decreases
• Gross profit and net income decrease
• Future periods may show higher margins if inventory is sold above written-down cost

Exam Tip: The CFA exam frequently tests the IFRS vs GAAP difference on reversals and asks you to calculate the correct write-down amount under each framework.

Practice inventory valuation in our CFA Level I question bank.