Reversal of Inventory's NRV under IFRS

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alpha668

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CFAI Curriculum Vol 3.
It is stated that in the text (NRV : Net Relizable Value)
P.381 last paragraph ~ P.382 1st paragraph
In the event that the value of inventory declines below the carrying amount on the B/S, the inventory carrying amount must be written down to its NRV and the loss (reduction in value) recognized as an expense on I/S.
P.382 2nd paragraph
Reversal (limited to amount of the original write-down) is required for a subsequent increase in the value of inventory previously written down. The amount of any reversal of any write-down of inventory arising from an increase in NRV is recognized as a reduction in cost of sales (a reduction in the amount of inventories recognized as an expense).
My question : How about the following two scenarios ?
1. the value of inventory rises above the carrying amount on the B/S.
2. The reversal of the inventory in subsequent period is more than the amount of the original write-down.
 
Sorry, my questions raised above shall be corrected as follows.
1. How about the case that the NRV rises above the carrying amount on the B/S and the NRV > cost ?
2. Is it that the reversal of the inventory in subsequent period will be same for the following two cases ?
A. reversal is more than the amount of the original write-down
B.reversal is equal to the amount of the original write-down
 
Hello there,
Carrying amount of Inventory is the smaller of NRV and cost. Carrying amount cannot be greater than cost in normal case (excluding some exception cases).
 
1. The carrying amount is lower of NRV and the cost.
2. The reserval of previous written-down amount goes to I/S as Gain. Any further increase is treated under the revaluation moethod as revaluation surplus in other comprehensive income and accumulated in Equity.
Ex. inventory reported as 100 in year 1. In year 2, it becomes 95: 5 goes to Loss. In year 3 it becomes 108: 5 goes to Gain in I/S and 8 goes to Revaluation Surplus in OCI.
Plz anyone correct me if I am wrong.
 
zxfmontreal wrote:
Ignore my previous post…seems for inventory, it is different…
Click to expand...
you’re thinking along the right track, but your post refers to the treatment of long-lived asset revaluation.
inventory write-up cannot exceed any past write down. for example (in its simplest form), say inventory gets written down to $80 from $100 ($20 write-down), and then prices increase and the inventory is now worth $110, you may only recognize the gain up to the original $20. the additional $10 does NOT go into a revaluation account as it would for long-lived assets - you miss out on this gain.
 
cgottuso8190 wrote:
zxfmontreal wrote:
Ignore my previous post…seems for inventory, it is different…
Click to expand...
you’re thinking along the right track, but your post refers to the treatment of long-lived asset revaluation.
inventory write-up cannot exceed any past write down. for example (in its simplest form), say inventory gets written down to $80 from $100 ($20 write-down), and then prices increase and the inventory is now worth $110, you may only recognize the gain up to the original $20. the additional $10 does NOT go into a revaluation account as it would for long-lived assets - you miss out on this gain.
Click to expand...
It seems that this shall be the right answer to my questions. The revaluation model for inventory shall be different from that for LLA.
If the gain (reversal) resulted from new NRV < original write-down, the gain shall be recognized as a reduction in COS (increase in NI).
If the gain resulted from new NRV > original write-down, only the amount of original write-down shall be recognized as a reduction in COS (increase in NI). Any amount of new NRV in excess of original write-down is not recognized on either I/S or B/S (Revaluation Surplus/OCI/Equity). But I can not find such statements in CFAI text. Am I missing them ?
 
Sorry, my above post shall be corrected as follows.
If the gain (reversal) resulted from new NRV < original write-down, the gain (reversal) shall be recognized as a reduction in COGS (increase in NI).
If the gain resulted from new NRV > original write-down, only the amount of original write-down shall be recognized as a reduction in COS (increase in NI). Any amount of new NRV in excess of original write-down is not recognized on either I/S or B/S (Revaluation Surplus/OCI/Equity). But I can not find such statements in CFAI text. Am I missing them ?
 
Alpha668, the fact that you cannot reverse more than you originally wrote down is a simple consequence of the general rule that inventory is measured at the lower of cost and NRV. In a situation where NRV becomes very high, reversing any previous write-downs brings you up to cost … and you need to stop there.
 
Wojtek wrote:
Alpha668, the fact that you cannot reverse more than you originally wrote down is a simple consequence of the general rule that inventory is measured at the lower of cost and NRV. In a situation where NRV becomes very high, reversing any previous write-downs brings you up to cost … and you need to stop there.
Click to expand...
Again, thanks for your response ! Your further explanations is very helpful to me.
The scenario in my above post shall be : gain from new NRV > original wtire-down and NRV is still lower than cost.
On the other hand, my understaning is that if there is a further loss from new NRV (after original write-down, and the cost is higher than NRV) the loss shall be recognized as an increase in COS (and a reduction in NI). The carrying amount on B/S shall be the New NRV. Am I right ?
 
I’m really not sure if I understand the scenario which you want to present. Can you try with some numbers?
 
Wojtek wrote:
I’m really not sure if I understand the scenario which you want to present. Can you try with some numbers?
Click to expand...
Assume following scenarios, please correct me if I am wrong. Thank you !
t=0, cost =10M, NRV=8M, write-down=2M, carrying value on B/S = 8M, increase in COS & decrease in NI on I/S=2M=loss from NRV
t=1, cost=10M, New NRV=7M, write-down=1M (8M-7M), carrying value on B/S=7M, increase in COS & decrease in NI on I/S=1M=futher loss from original write-down. This is the scenario that there is a further loss from new NRV and NRV < cost).
t=2, cost=10M, New NRV=8.5M, gain from NRV=1.5M (8.5M-7M), carrying value on B/S=8M (only reversed to NRV at t=1), decrease in COS & increse in NI on I/S=1M (only the amount written down at t=1 is recognized as a gain on I/S, the amount (9M-8M=in excess of previously write-down of 1M at t=1 is not recognized either on B/S or I/S). This is the scenario that gains (1.5M) from NRV > previous write down of 1.0M (not “original write down” at t=0) and NRV < cost.
 
ok, I see what you mean. Don’t take the term ‘previous write-down’ so literally. When we say previous write-down, we mean the cumulative effect of all write-downs taken in the past.
In your scenario, at t=2, you would reverse 1.5 and that would go to the income statement. You would be able to reverse all the way back to 10M of carrying amount. It does not matter how large or small the ‘last’ write-down was.
I hope that makes it clear now :)
 
Wojtek wrote:
ok, I see what you mean. Don’t take the term ‘previous write-down’ so literally. When we say previous write-down, we mean the cumulative effect of all write-downs taken in the past.
In your scenario, at t=2, you would reverse 1.5 and that would go to the income statement. You would be able to reverse all the way back to 10M of carrying amount. It does not matter how large or small the ‘last’ write-down was.
I hope that makes it clear now :)
Click to expand...
OK, I now understand original/previous write-down means cumulative amount (not in one assessment).
But sorry, shall it be : at t=2, carrying value on B/S = 8.5M, decrease in COS & increase in NI = 1.5M ?
 
alpha668 wrote:
The amount of any reversal of any write-down of inventory arising from an increase in NRV is recognized as a reduction in cost of sales (a reduction in the amount of inventories recognized as an expense).
Click to expand...
I have a different question about the same topic; I hope someone still checks this post. I don’t really understand the quoted sentence. The way I thought it worked, a reversal of an inventory write-down would increase COGS, thus decreasing NI. But I guess that’s not what happens. Instead:
-A write down in Q1 goes onto the I/S as a Loss, hence reducing NI
-A reversal of a write down in Q2 goes onto the I/S as a Gain, but a specific kind of gain: it reduces an Expense against Revenue, namely the Cost of Sales.
Do I have it right now?
 
The reversal is shown as a gain from inventory revaluation in the COGS bucket, hence reducing COGS, and increasing gross profit and net income.
 
ok… thanks.
Then, in Q1 when there is a write-down, this is a Loss that is separate from COGS, yes?
 
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