Question

International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS.If circumstances indicate that an inventory write-down is no longer appropriate:

a) The write-down can be reversed under U.S. GAAP.
b) The write-down can be reversed under IFRS.
c) The write-down can be reversed under both U.S. GAAP and IFRS.
d) The write-down can't be reversed under either U.S. GAAP or IFRS.

Answer 1

An inventory write-down can be reversed under IFRS if the net realizable value increases but cannot be reversed under U.S. GAAP. Option B is correct.

Step-by-step explanation:

If circumstances indicate that an inventory write-down is no longer appropriate, the correct answer is that b) The write-down can be reversed under IFRS. Under International Financial Reporting Standards (IFRS), if there's evidence that the net realizable value of inventory has increased after a write-down, an entity is allowed to reverse the write-down amount so that the new carrying amount is the lower of the cost and the revised net realizable value. This cannot exceed the original cost, however.

In contrast, under U.S. Generally Accepted Accounting Principles (U.S. GAAP), once an inventory write-down has been recognized, it cannot be reversed even if the value of the inventory subsequently recovers.