Final answer:
Under IFRS, inventory write-downs can be reversed if the value of the inventory subsequently increases, but not beyond the original write-down amount. In contrast, US GAAP does not allow for write-down reversals to prevent earnings management and maintain conservative reporting.
Step-by-step explanation:
Inventory write-downs under International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Principles (US GAAP) have specific circumstances where they might be reversed.
Under IFRS, inventory write-downs can be reversed in future periods if the reasons for the initial write-down no longer apply. This means that if the inventory's value recovers because the market price increases or the utility of the inventory improves, the amount of the write-down can be restored, up to the amount of the original write-down. However, the increase should be recognized in the income statement, reducing the cost of sales. This reversal is allowed to promote the reflection of the true value of the inventory on the balance sheet.
In contrast, under US GAAP, once inventory is written down via a lower of cost or market (LCM) approach, the write-down is considered permanent, and there is no reversal allowed if the market value increases in subsequent periods. The reasoning behind this is to prevent earnings management and maintain conservative financial reporting practices.