QUESTION:

1.   Company XYZ operates in a country where the local GAAP requires that inventory be valued at the lower of cost or market. XYZ's inventory has a replacement cost that is lower than its carrying amount on the balance sheet. However, the selling price of the inventory is expected to be higher than its replacement cost. Under IFRS, what is the appropriate accounting treatment for XYZ's inventory?

Answer:

Under IFRS, inventory should be valued at the lower of cost and net realizable value (NRV). NRV is defined as the estimated selling price less the estimated costs of completion and disposal.

In this case, the replacement cost of the inventory is lower than its carrying amount, but the selling price is expected to be higher than the replacement cost. This suggests that the NRV of the inventory is higher than its replacement cost.

Therefore, under IFRS, the appropriate accounting treatment for XYZ's inventory would be to value it at its cost, since cost is lower than NRV. This is because the selling price is expected to be higher than the replacement cost, and therefore the NRV is higher than the replacement cost.

In summary, under IFRS, XYZ's inventory should be valued at cost, since it is lower than the estimated net realizable value.