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| Haskell Corporation has determined its year-end inventory on a FIFO basis to be $803,000. Information pertaining to that inventory is as follows: |
| Selling price | $832,000 |
| Costs to sell | 44,000 |
| Replacement cost | 774,000 |
| What should be the reported value of Haskell’s inventory if the company prepares its financial statements according to International Financial Reporting Standards (IFRS)?
$803,000. $774,000. $709,000. $788,000. |
Expert Answer
IFRS requires that inventory should be valued at lower of cost or market value whichever is lower.
FIFO
Under IFRS, FIFO method is one of the acceptable method for deriving the cost of inventory, the cost has been mentioned as $ 803,000/- in the question.
Replacement cost
It has been mentioned in question as $ 774,000 /-
Net realizable value
= Selling price – cost of disposal
= 832,000 – 44,000
= $ 788,000
Net realizable value
Net realizable value – profit margin
= 780,000 – 75,000
= $ 705,000
Under IFRS, replacement cost is used as market value, when it is lower than net realizable value but higher than (net realizable value – normal profit margin), hence $ 774,000 will be considered as market value
Thus, carrying value of inventory is lower of cost (FIFO- $780,000) or market value (replacement cost – $774,000) i.e. $ 7,74,000
