What is the difference between lower of cost and NRV under IFRS versus LCM under US GAAP?
I keep mixing up how IFRS and US GAAP handle inventory write-downs. IFRS uses 'lower of cost and net realizable value' while GAAP uses 'lower of cost or market.' What exactly is the 'market' in GAAP, and when can you reverse a write-down? A side-by-side comparison would really help.
This is one of the most tested IFRS vs. GAAP differences in CFA Level I FRA. Let me break it down clearly.
IFRS Approach (IAS 2) — Simpler
Compare cost to NRV. NRV = estimated selling price minus estimated costs to complete and sell. If NRV < cost, write down to NRV.
Example: Belmont Electronics carries 500 units of a tablet at $320 each (cost). Market conditions have dropped. Estimated selling price is $290, and selling costs are $15 per unit.
- NRV = $290 - $15 = $275
- Cost = $320
- Write-down = $320 - $275 = $45 per unit (total $22,500)
US GAAP Approach (ASC 330) — More Complex
"Market" means replacement cost, but it is bounded:
- Ceiling = NRV (can't exceed this)
- Floor = NRV minus normal profit margin
Market = replacement cost, but capped at the ceiling and floored at the floor.
Using the same Belmont Electronics example, suppose replacement cost is $260 and normal profit margin is $30 per unit:
- NRV (Ceiling) = $275
- Floor = $275 - $30 = $245
- Replacement cost = $260 (between $245 and $275, so Market = $260)
- Write-down = $320 - $260 = $60 per unit
Key difference on reversals:
| Feature | IFRS | US GAAP |
|---|---|---|
| Measurement | Lower of cost and NRV | Lower of cost or market |
| Write-down reversal | Allowed (up to original cost) | Not allowed |
| LIFO permitted? | No | Yes |
The reversal rule is critical: if market conditions improve next year, IFRS lets Belmont reverse the write-down (but never above the original $320 cost). US GAAP does not — the write-down establishes a new, permanent cost basis.
Exam tip: When a CFA Level I question asks about inventory write-downs, first identify which standard applies (IFRS or GAAP), then apply the correct comparison. The GAAP ceiling/floor test is a frequent exam trap.
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