(Question and Answer): Haskell Corporation has determined its year-end inventory on a FIFO basis to be $803,000. Information pertaining to that inventory is as follo

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

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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

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