Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

15. GAAP vs IFRS

GAAP vs. IFRS: Inventory


GAAP vs. IFRS: Inventory

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Alright, let's discuss some of the differences from Gap and offers when it comes to inventories. Alright, so inventories here. Remember when we talk about Gap, that's what we focus on in this course and those are the generally accepted accounting principles and those are the rules here in the US that we follow and those are set by the financial accounting standards board faz be they set Gap and those are the rules that were focused on when we talk about different issues in this course. But for the most part we've got a lot of similarities with the international standards and those are set by the International Accounting Standards Board and they create offers the international financial reporting standards. Cool. So let's go ahead and let's focus on the differences here. When it comes to inventory. Let's start with the similarities. And what we'll see is that the initial purchase is always at historical cost. Just like we learned whatever we paid for the inventory. Well that's gonna be the cost of the inventory. Initial purchase at historical cost straight forward. That's gonna be the same for both. But then we have our subsequent valuations which is also similarly done with that lower of cost or market method that we learned right. Lower of cost or market. So if the market value has decreased, well we should decrease the value of our inventory. That's the same between gap and differs. Okay, another similarity we've got the ownership of goods. Remember we talked about free on board destination and free on board shipping point. Well that's when we use a shipping company who owns the goods. At what point does the ownership transfer? Well, that's the same rules that we follow when it comes to gap and differs. So some of the main differences here, and this is a big one. Is that ifor's prohibits life. Oh you're not allowed to use life. Oh method when you do heifers uh offers for your inventory. Okay, so that's a big difference between gap and differs. They don't allow life. Oh and that's because life. Oh it kinda is a little it's a little weird, right? Because we're taking our latest costs that we have and those are the ones we're assigning to cost of goods sold and we have these old values that kind of just sit on the books. Remember I like to think about the fair values and it wants those inventories to reflect more closely what they're actually worth today. Okay. And that's why they prohibit life. Oh because that means that you keep selling the new ones and those keep going to your cost of goods sold. And the old ones just stay on your books. So they prohibit life. Oh and then the lower of cost or market calculation though, they both use the lower of cost or market the way they treat the rules is a little differently. Gap uses replacement cost. Okay, replacement cost is what they consider the market and that means what would it cost you to replace that inventory today? What's it worth today, basically on the market where I first uses this idea of Net realizable value, where it takes what you could sell it for and it subtracts any selling costs that you might have related to to selling that inventory. Okay. So you don't have to get caught up in the calculations of lower cost or market. Uh you can just focus on what we learned in our lower of cost or market video, but this is a difference. So you can see that there's a small difference when they're calculating lower of cost or market. But this principle remains the same of making sure that you're updating that inventory value if we think that it's been devalued. Okay, so that's about it here for the for the gap in differs differences. Let's go ahead and move on to the neck.