Final answer:
An unrealized holding gain or loss on inventory is reported in income when inventory is accounted for using the fair value method, specifically if inventory is classified as a trading security. This contrasts with the historical cost method, where gains or losses are recognized only upon sale of the inventory. The fair value and historical cost methods are subject to criteria set by IFRS and U.S. GAAP.
Step-by-step explanation:
An unrealized holding gain or loss on inventory is reported in income when a company uses the fair value method for accounting for its inventory under certain conditions, such as when the inventory is being accounted for as a trading security. This would be applicable when a company has chosen or is required to report inventory at fair value instead of historical cost. The change in fair value of the inventory before it is sold (unrealized) will be reported in the income statement as part of net income or loss for the period. This is different from the historical cost method, where gains or losses are not recognized until the inventory is actually sold (realized).It's worth noting that the International Financial Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (GAAP) have specific criteria for when the fair value method can be applied.
It's also important to consider that the accounting treatment can significantly impact the financial statements and the company's financial analysis.In the situation where the cost of inventory has decreased below its original purchase price and the company still holds the inventory, an unrealized holding loss on inventory will be reported in income. This means that the value of the inventory has decreased, but the company has not yet sold or disposed of it.For example, let's say a company purchased inventory for $1,000. However, the market value of the inventory has dropped to $800 due to changes in market conditions. In this case, the company would report an unrealized holding loss of $200 on the inventory in its income statement.It's important to note that unrealized holding gains or losses on inventory are only reported in income if the inventory is still held by the company and not yet sold or disposed of.