[Anonymous]

Rule: Inventory losses from “permanent market declines” are recognized in the interim period, incurred and later, if they “turn-around,” are recognized as gains in a subsequent interim period only to the extent of previously reported losses.

So if there is a permanent inventory loss in Feb for $360,000 which is reported fully in March qtr financial statements. Later, say, in the same year, there is a permanent increase for $500,000 in August, then the amount of gain reported in September qtr financial statements would be $360,000 or $140,000?

And if, the correct answer is $360,000, then where will the balance gain of $140,000 go?

Can someone please explain this to me.

Thanks in advance!!

[jstay]

just 360,000 the 140,000 would be moot and not included in anything

[M.O.D.]

The secondary gain is 360, limited to the original loss of 360. The 140 does not go anywhere. Inventory is never marked up to market, it is only reduced. This exception only applies to quarterly statements. If the decline had been recorded in the annual statements, the company would be out of luck if that decline reverses.

Second, the term “permanent” is misleading. How could the decline be permanent if it reverses a few months later?

The company thought erroneously that it was “permanent”. If they would have thought correctly that it was a temporary decline, they would not have made any adjustment.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[mla1169]

Inventory is valued using LCM (lower of cost or market) when the market value is lower than the cost you write it down. If the cost is lower you use the cost not the market value which was $140k more than the cost.

And if the decline was recognized in one year's annual statements but something happens in a subsequent year that it increases in value the gain can be recognized, absolutely. The reference to interim periods doesn't mean gains and losses can't be recognized at year end it means you only recognize losses at year end UNLESS they are considered permanent. This means companies aren't adjusting their inventory balance to market monthly.

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Massachusetts CPA (non reporting) since 3/12.

[M.O.D.]

Per Gleim, “once inventory is written down, the reduced amount is the new cost basis, and write-up ordinarily will not be permitted if prices increase.” Write-ups are only permitted for interim periods.

This differs from IFRS where “a write-down may be reversed but not above original cost.”

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Anonymous]

Thank you everyone for your prompt responses..

[Author]

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