Inventory Valuation under IFRS and GAAP: This Article Is Based on a Study Supported by the IMA[R] Research Foundation
Krishnan, Sudha, Lin, Ping, Strategic Finance
The Securities & Exchange Commission (SEC) is in the process of deciding whether U.S. companies can issue financial statements using International Financial Reporting Standards (IFRS). For management accountants, inventory valuation is of special concern. Though IFRS and U.S. Generally Accepted Accounting Principles (U.S.GAAP) have commonalities in inventory valuation requirements, they differ in initial measurement, subsequent measurement, disclosure requirements, and tax impact. Switching to IFRS wouldn't only require coordinating many regulatory authorities, such as the Public Company Accounting Oversight Board (PCAOB), the Internal Revenue Service (IRS), and the SEC, but it would also put pressure on changes to company information systems, internal controls, and tax planning.
We'll review the major milestones on the road to possible convergence, summarize the differences in inventory valuation between IFRS and GAAP, and identify major issues that companies switching to IFRS have to contend with.
According to the 2008 IFRS roadmap, the SEC was supposed to decide in 2011 whether U.S. companies can issue financial statements using IFRS from 2015 onward. In September 2009, the leaders of the G20 nations requested that the international accounting bodies create a single set of global accounting standards by June 2011. In November 2009, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) reaffirmed that they would continue to harmonize their respective standards and try to meet the 2011 deadline. In February 2010, the SEC issued a "Statement in Support of Convergence and Global Standards" and issued a Work Plan highlighting six areas of concern commentators raised.
Although the SEC didn't decide by June 30, 2011, they sponsored a roundtable on July 7, 2011, to further analyze issues related to investor analysis and knowledge of IFRS, as well as the impact of IFRS on smaller public companies and the regulatory environment. In addition, the Office of the Chief Accountant at the SEC issued working papers in May and November 2011 on implementation issues, differences in GAAP vs. IFRS, and analysis of foreign issuers already using IFRS. In November 2011, the Division of Corporate Finance at the SEC also issued an analysis of IFRS in practice.
Currently, most U.S. companies aren't expected to be filing with IFRS for the next five years. Yet the SEC requires three years of comparative statements, which implies that if IFRS becomes applicable by 2015 (as per the SEC statement above), some companies may need to adopt the new standards in 2012. In a speech to the American Institute of Certified Public Accountants (AICPA) on December 5, 2011, SEC Chief Accountant James Kroeker indicated that they "are in the final stages of completion of the majority of the field work related to the Work Plan (2010)." He also said the SEC does need more time and that they are many months away from finalizing any decision related to IFRS (www.sec.gov/news/speech/2011/spch120511jlk.htm).
But the move to converge to IFRS has tentatively been set. Accounting practitioners and educators need to prepare for the transition now and learn the differences between these two sets of standards. Management accountants in particular need to educate themselves about inventory valuation. In manufacturing and merchandising industries with significant inventories, different valuation methods not only affect assets on a balance sheet, but they also result in different cost of goods sold (COGS) reported and have implications for tax planning. For example, Exxon Mobil Corp. reported that its replacement cost of inventories at 2010 and 2009 yearends exceeded its last-in, first-out (LIFO) inventories by $21.3 billion and $17.1 billion, respectively. Because IFRS doesn't allow for the LIFO inventory valuation method, companies like Exxon Mobil, which adopts LIFO under GAAP, would face tremendous difficulty in the transition. …