Question

Do you believe that companies should be allowed/required to reverse prior inventory write-downs if the market...

Do you believe that companies should be allowed/required to reverse prior inventory write-downs if the market value of the inventory increases in periods subsequent to the initial write-down?

Homework Answers

Answer #1

IFRS and GAAP accounting also differ when it comes to inventory write-down reversals. GAAP specifies that if the market value of the asset increases, the amount of the write-down cannot be reversed. Under IFRS, however, in this same situation, the amount of the write-down can be reversed. In other words, GAAP is overly cautious of inventory reversal and does not reflect any positive changes in the marketplace.

US GAAP follows the principle of conservatism, on both balance sheet and Income statement since it recognizes losses or decline in market value as they occur, whereas increases are reported only when inventory is sold. Hence, in my view companies should NOT be allowed/required to reverse prior inventory write-downs if the market value of the inventory increases in periods subsequent to the initial write-down.

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