Financial Education

U.S. GAAP requires that inventory values on the balance sheet be stated at the lower of cost or market value. If inventory declines in value while being held it must be written down to the “current replacement cost,” which can be between the actual realizable value and the realizable value less discounted by a normal profit margin. This value then represents a new cost basis, from which the inventory could still decline but cannot increase in value.

Under International Accounting Standards, the values are to be the lower of cost or “net realizable value,” which is similar in definition to the current replacement cost adjusted for selling costs. A key difference, however, is that this does not represent a new cost basis. Should the inventory subsequently increase in value, the writedown can be reversed up to the original cost basis.

Under both accounting standards, the inventory values for certain commodities are stated at market value even when this is above the original cost basis.

For more information, see all articles on: Accounting

See also:

Determining Inventory Cost

Inventory Accounting: Differences Between U.S. GAAP and International Standards

How the Inventory Accounting Method Affects the Income Statement

Inventory Accounting Methods: LIFO, FIFO, Weighted Average and Specific Identification

What is the Cost of Sales?