CFA Level IFinancial Statement AnalysisMedium
Last year, a company wrote down inventory from its original cost of $100,000 to a net realizable value of $70,000, recognizing a $30,000 loss. This year, the market value of that same inventory recovers to $110,000. Under IFRS, what is the maximum carrying value to which the inventory can be written back up?
- A$30,000
- B$70,000
- C$110,000
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: D. $100,000
IFRS permits reversal of inventory write-downs, but the reversal is limited to the original cost basis of $100,000; it cannot exceed the amount previously written down. US GAAP does not permit reversals at all once inventory is written down.
Why the other options are wrong
- A. This is the amount of the original write-down, not a valid carrying value.
- B. This is the impaired carrying amount before any reversal, not the maximum allowed.
- C. IFRS does not allow inventory to be written up above original cost, even if market value is higher.
Inventory Write-Down Reversal (IFRS)
Under IFRS, if the value of previously written-down inventory recovers, the write-down can be reversed, but only up to the original cost; US GAAP prohibits any reversal.
- IFRS allows reversal, capped at original cost
- US GAAP: write-downs are permanent, no reversal allowed
- Reversal is recognized as a reduction in COGS in the period it occurs
Memory trick: IFRS lets you bounce back, but never higher than where you started.