Tuesday, July 20, 2010
Convergence with IFRS
It seems that government is too slow in implementing IFRS completely. The regulators are just lethargic to implement the same
Friday, February 19, 2010
IAS 2 Inventories
IAS 2: Inventories:
The death if LIFO method of inventory valuation:
The Indian Accounting Standards are in tune with IFRS in respect of inventory valuation. Like in the Indian GAAP , IFRS also does not recognize LIFO method for valuation of inventories.
LIFO method of inventory valuation was widely used in US. The reason for its immense popularity was the lower tax consequences on adoption of LIFO method. Over time, LIFO can have a significant cumulative downward effect on the inventory's value. As we know the cost of goods sold for any particular year equals the sum of beginning inventory, plus purchases less ending inventory. Thus during the period of rising prices the lower cost of ending inventory increases the cost of goods sold and thus reducing the taxable profits. Companies widely adopted LIFO primarily to lower their income tax liability and to postpone paying taxes, but it also reduces income for financial reporting purposes.
With the adoption of IFRS, the use of LIFO will completely disappear. A change from LIFO will normally have a significant positive income effect because the accumulation of prior years' costs in beginning inventory will replace cost of goods sold valued at current costs. Assuming that the inventory turns over, income for the year of change would increase by the entire amount of the LIFO reserve. Nevertheless the elimination of LIFO will lead to fair presentation of income for tax purposes.
The impact of elimination of LIFO will certainly be significant. In 2007, Exxon Mobil Corp. reported its aggregate replacement cost of inventories at year-end exceeded the inventories' LIFO carrying value by $25.4 billion. The Sherwin Williams Co. reported that if it had used FIFO instead of LIFO, its net income for 2007 would have been $40.8 million higher.
The death if LIFO method of inventory valuation:
The Indian Accounting Standards are in tune with IFRS in respect of inventory valuation. Like in the Indian GAAP , IFRS also does not recognize LIFO method for valuation of inventories.
LIFO method of inventory valuation was widely used in US. The reason for its immense popularity was the lower tax consequences on adoption of LIFO method. Over time, LIFO can have a significant cumulative downward effect on the inventory's value. As we know the cost of goods sold for any particular year equals the sum of beginning inventory, plus purchases less ending inventory. Thus during the period of rising prices the lower cost of ending inventory increases the cost of goods sold and thus reducing the taxable profits. Companies widely adopted LIFO primarily to lower their income tax liability and to postpone paying taxes, but it also reduces income for financial reporting purposes.
With the adoption of IFRS, the use of LIFO will completely disappear. A change from LIFO will normally have a significant positive income effect because the accumulation of prior years' costs in beginning inventory will replace cost of goods sold valued at current costs. Assuming that the inventory turns over, income for the year of change would increase by the entire amount of the LIFO reserve. Nevertheless the elimination of LIFO will lead to fair presentation of income for tax purposes.
The impact of elimination of LIFO will certainly be significant. In 2007, Exxon Mobil Corp. reported its aggregate replacement cost of inventories at year-end exceeded the inventories' LIFO carrying value by $25.4 billion. The Sherwin Williams Co. reported that if it had used FIFO instead of LIFO, its net income for 2007 would have been $40.8 million higher.
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