IAS 2.

Inventories

IAS2 (IFRS) U.S. GAAP

Report on Balance Sheet: Report on Balance Sheet:
Value = Lower value (Historical Cost, Net Value = Lower value (historical Cost,
Realizable Value) Market)
NRV = estimated selling price less costs of
completion and other costs to make sale Market = Replacement cost

Historic cost is constant over the life of the inventory

Example
Application of Lower of Cost or Net Realizable Value Rule
Assume that Distributor Company Inc. has the following inventory item on hand
at December 31, Year 1: $
Historical cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000.0
Replacement cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880.0
Estimated selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900.0
Estimated costs to complete and sell . . . . . . . . . . . . . . . . . . 50.0
Net realizable value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850.0
Normal profit margin—15% . . . . . . . . . . . . . . . . . . . . . . . . 127.5
Net realizable value less normal profit margin . . . . . . . . . . . 722.5

The journal entry at December 31, Year 1 related to Inventory under IFRS and U.S. GAAP
IFRS U.S. GAAP
Report on balance sheet value Report on balance sheet value
= Lower value (historical Cost, NPV) = Lower value (historical Cost, replacement cost)
= Lower value (1,000;850) = Lower value (1,000; 880)
$850 $880

The journal entry at December 31, year 1 is

Inventory Loss $150 Inventory Loss $120
Inventory $150 Inventory $120
IFRS
Inventory
Jan 1, Y1 1,000
150
Dec 31, Y1 850

U.S. GAAP
Inventory
Jan 1, Y1 1,000
120
Dec 31, Y1 880
IAS 16. Property, Plant & Equipment (PPE)

IAS16 (IFRS) U.S. GAAP

Component depreciation is
Component Depreciation
not commonly
Example
On January 1, Year 1, an entity acquires a new piece of machinery with an estimated useful life of 10 years for $150,000
The company has determined that the straight-line method of depreciation
The component as following
Useful Life
Component Cost ($)
(years)
Motor 20,000 5
Inspection 4,000 2
Machine ? ?
Total ?
1.Calculate Depreciation Year 1 follow IFRS?
2.Calculate Depreciation Year 1 follow U.S. GAAP ?
1) IFRS
Useful Life
Component Cost ($) Depreciation
(years)
Motor 20,000 5 4,000
Inspection 4,000 2 2,000
Machine 126,000 10 12600
Total 150,000 18,600

Depreciation Year 1 follow/under IFRS: $18,600

2) U.S. GAAP
= $ 150000/10 Years
$15,000

Depreciation Year 1 follow/under U.S. GAAP: $15,000

ears for $150,000
IAS 36. Impairment Loss
IAS 36, Impairment of Assets,requires impairment testing and recognition of
impairment losses for property, plant, and equipment; intangible assets; goodwill; and
investments in subsidiaries, associates, and joint ventures. It does not apply to inventory,
construction in progress, deferred tax assets, employee benefit
assets, or financial assets such as accounts and notes receivable

IFRS U.S.GAAP
Impairment means carrying amount (Book value) > Impairment means carrying
recoverable amount: amount > undiscounted future
cash flows (Expected future cash
Recoverable amount = greater value (Net selling price; flows)
value in use)
Net selling price = price in active market less disposal
costs

Value in use = Present Value of future net cash flows

IFRS
At December 31, year 1, Toca Company has equipment with the following:
Carrying amount (Book value) 50,000 Value in use
Selling price 40,000 Net Selling Price
Costs of disposal 1,000
Expected future cash flows 48,000 Recoverable amount
Present value of expected future cash flows 46,000
Required:
Under IFRS Carrying amount ($50,000) > Recove
1) Impairment or not impairment? Yes Impairment Loss = 50,000 - 46,000 =
2) How much? $4,000
3) Entry journal at Dec 31

Impairment Loss $ 4,000

Equipment $ 4,000 U.S. GAAP
Undiscounted future cash flows
Under U.S. GAAP Carrying amount
1) Impairment or not impairment? yes
2) How much? $2,000 Because
3) Entry journal at Dec 31 Carrying amount ($50,000) > undisc
Impairment Loss = 50,000 - 48,000 =
Impairment Loss $ 2,000
Equipment $ 2,000

II. Reversal of Impairment Loss

Reverse if recoverable amount > new carrying amount

Example for Reversal of Impairment Loss

Equipment Jan 1, Year 1 55,000 Depreciation expense Y1 = 55,000/1
Expectation useful life for 10 years with no residual val 10
End of Year 1
Carrying amount (book value) 49,500 History cost - accumulated deprecia
Selling price 40,000
Costs of disposal 1,000
Present value of expected future cash flows 55,000
Expected future cash flows 46,000

End of year 2
Present value of expected future cash flows 50000
Net selling Price 47000
Expected future cash flows 51,000
= 55000 - (55000/10)*2 History cost - accumulated deprecia
New carrying amount 44,000
Recoverable amount = greater value (50,000; 47,000) = $50,000
Because
Recoverable amount ($50,000) > new carrying amount ($44,000)
-> Reversal of impairment loss

Equipment $6,000
Reversal of impairment Loss (increase income) $ 6,000
46,000
= 40,000 -1,000
39,000
= Greater value (Net selling price; value in use)
= greater value (46,000; 39,000)
46,000
mount ($50,000) > Recoverable amount ($46,000)
Loss = 50,000 - 46,000 = $ 4,000

ed future cash flows 48,000

50,000

mount ($50,000) > undiscounted FCF ($48,000)

Loss = 50,000 - 48,000 = $ 2,000

n expense Y1 = 55,000/10 = 5,500

- accumulated depreciation

- accumulated depreciation
Home work. Applying IAS 36

Madison Company acquired a depreciable asset at the beginning of Year 1 at

a cost of $12 million. At December 31, Year 1, Madison gathered the following
information related to this asset:
Carrying amount (net of accumulated depreciation). . . . . . . . . . . . . . . $10 million
Fair value of the asset (net selling price) . . . . . . . . . . . . . . . . . . . . . . . . $7.5 million
Sum of future cash flows from use of the asset . . . . . . . . . . . . . . . . . . $10 million
Present value of future cash flows from use of the asset . . . . . . . . . . . $8 million
Remaining useful life of the asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years

Requirement:
Under IFRS and U.S. GAAP
1) Is asset impairment?
2) If yes, How much?
3) Journal entry at December 31, Year 1

IFRS
value in use $8
Net selling price $7.50
Recoverable amount = greater value (value in use, net selling price) = $8
Carrying amount $10

1) Yes because carrying amount ($10) > Recoverable amount ($8)

2) Impairment Loss = Carrying amount - recoverable amount = $2
3) Journal entry

Impairment Loss $2
Asset $2

U.S. GAAP
Undiscounted cash flow $10
Carrying amount $10

1) No impairment
2) No impairment Loss
3) No journal entry relate to impairment loss
Szabo Company Inc. incurred costs to develop a specific product for a customer
in Year 1, amounting to $300,000. Of that amount, $250,000 was incurred up to
the point at which the technical feasibility of the product could be demonstrated,
and other recognition criteria were met. In Year 2, Szabo Company incurred an
additional $300,000 in costs in the development of the product. The product was
available for sale on January 2, Year 3, with the first shipment to the customer
occurring in mid-February, Year 3

Year 1
Development cost $250,000
Intangible asset $50,000 = 300,000 - 250,000
Journal Entry (Not pay yet)
Development expense $250,000
Intangible asset $50,000
Account payable $300,000

Year 2
Development cost $0
Intangible asset $300,000

Journal entry (Cash)

Intangible asset $300,000
Cash $300,000
t for a customer
as incurred up to
be demonstrated,
any incurred an
The product was
o the customer
ISVNU VCB
million VND
Building 10
Interest rate 0.5%/mont 0.01
Year 3

I) After 2 years, building is done

Browing cost
1.8 1.2

Total building value 11.8 11.2

Assume that Rex Company Inc. has the following inventory item on hand at
December 31, Year 1: History cost: $1,000; Replacement Cost: $900; Estimated
selling price: $920; Estimated costs to complete and sell: $50;. How much Inventory
loss year 1 under IFRS

Inventory Loss

NRV 920
50
870

Report on balance sheet = lower value (Cost, NRV)

= Lower value ($1,000; $870)
$870

Inventory Loss = $1000 - $870

$130

On January 1, Year 1, an entity acquires a new machine with an estimated useful life of 20
years for $100,000. The machine has an electrical motor that must be replaced every five
years at an estimated cost of $20,000. Continued operation of the machine requires an
inspection every four years after purchase; the inspection cost is $10,000. The company uses
the straight-line method of depreciation. What is the depreciation expense for Year 1 under
IFRS?

Component Year Depreciation expense

20,000 5 4,000
10,000 4 2,500
70,000 20 3,500
100,000 10,000
on hand at
00; Estimated
much Inventory

useful life of 20
aced every five
ne requires an
he company uses
for Year 1 under
IAS37
Onerous Contract
Year 1
Company A produces Shoes. It has a noncancelable lease contract with Company B on a building in USA. The lease expires on
The annual lease payment is $100,000.
However, In October, Year 1, the company A closes building in USA, moves to Mexico
The company doesn't have any benefit from building in USA in year 2

1. Does company A have pay lease fee for Year 2? Yes

How much? $100,000

December 31, year 1

Noncancelable lease expense $100,000

Provision for future lease payment $100,000

Extra question
Company A pays company B the fee in the end of every year by bank
Please journal entry related to lease payment on December 31, year 1

Lease expense $100,000

Cash in bank $100,000

Dr Noncancelable lease expense $100,000

Cr Cash In bank $100,000
g in USA. The lease expires on December 31, year 2, Operating lease
•Exchange rates are reflected both as US $ equivalent (direct quotes) and currency per US $ (ind

Today
Direct quotes Indirect quotes
1 FC = …….. USD 1 USD= …...FC
0.04264392 23.45
•A direct quote is the reciprocal of an indirect quote and vice-versa.

Direct quote = 1/indirect quote

indirect quote = 1/direct quote

Direct quotes
1 Forein Currency = ……….USD
1 EURO =1.3636 USD (Feb,15)
1 EURO 0.733352889 USD

1 POUND =1.5668 USD (Feb, 16)

1 USD yuan (Feb 15)
6.835 Yuan
•Spot rate – today’s price for purchasing or selling a foreign currency.
•Forward rate – today’s price for purchasing or selling a foreign currency for some
ØPremium -- when the forward rate is greater than the spot rate for a particular day
ØDiscount -- when the forward rate is less than the spot rate for a particular day.
Today April 6, 2020
1 VND = 0.0426 USD Spot rate for April 6, 2020
1 VND = 0.0426 USD Forward rate for April 30, 2020
Spot rate for April 30, 2020
1 VND = 0.0427 USD Premium
1 VND = 0.0425 USD Discount
Vietnamese Company selling product to US company
make payment on april 30, 2020

Foreign Currency Transaction

Example 1
•A Inc., a U.S. company, makes a sale and ships goods to B, SA, a Mexican custome
•Sales price is $100,000 (U.S.) and A allowsB to pay in pesos in 30 days.
•The current exchange rate is $0.10 per 1 peso.
Suppose the peso decreases such that in 30 days the exchange rate is $0.09 per 1 pes
US Company accounting
Explaination: Example 2
1. Exporter: US Company (US dolar) •A Inc., a U.S. c
2. Transaction currency: Peso •Sales price is $
•The current ex
1 Peso= 0.1 USD Suppose in 30 da
1,000,000 100,000

Day 1 Day 1
Dr Accounts Receivable $100,000 Dr
Cr Sales $100,000 Cr

Day 30 Company B need to pay how

How much in US dolar does Company A receive? $100,000
1 Peso 0.09 USD
1,000,000 90,000 Company have to pay

Foreign Exchange Loss $10,000 Day 30

Accounts Receivable $10,000 How much in US dolar does
1 Peso
Bank/Cash $90,000 952,381
Accounts Receivable $90,000
Forgeign exchange gain
Or
Foreign Exchange Loss $10,000 Dr
Bank/Cash $90,000 Cr
Accounts Receivable $100,000 Cr
Or
Dr
Cr

Dr
Cr

Transaction types, exposure type and gain or loss – export sales

Foreign currency appreciates (Example 2)
Day 1 1 Peso 0.105 USD Day 1
Day 30 1 Peso 0.11 USD Day 30
--> foreign exchange gain

Foreign currency depreciates (Example 1)

Day 1 1 Peso 0.1 USD
Day 30 1 peso 0.09 USD
--> foreign exchange Loss

Import Purchase
Example 1
•A Inc., a U.S. company, purchase product 1 from Company B, SA, a Vietnamese su
•Product value is $100,000 (U.S.) and Company A have pay in Vietnam dong in 30 d
•The current exchange rate is $0.0428 per 1 VND in Day 1
Suppose in 30 days the exchange rate is $0.0430 per 1 VND

Day 1
Dr Product 1 $100,000
Cr Account Payable $100,000
How much money in VND company A have to pay?
1 VND 0.0428 USD

2,336,449 VND

Day 30
1 VND 0.043 USD
100,467.29 USD

Dr Foreign exchange Loss $ 467.29

Dr Account Payable $ 100,000.00
Cr Bank $ 100,467.29
Example 2
•A Inc., a U.S. company, purchase product 1 from Company B, SA, a Vietnamese su
•Product value is $100,000 (U.S.) and Company A have pay in Vietnam dong in 30 d
•The current exchange rate is $0.0428 per 1 VND in Day 1
Suppose in 30 days the exchange rate is $0.0410 per 1 VND

Day 1
Dr Product 1 $ 100,000
Cr Accounts Payable $ 100,000
How much money in VND company A have to pay?
1 VND 0.0428 USD

2,336,449 VND

Day 30
1 VND 0.041 USD
95,794.39 USD

Dr Accounts Payable $ 100,000.00

Cr Foreign Exchange gain $ 4,205.61
Cr Bank $ 95,794.39
d currency per US $ (indirect quotes).

currency.
gn currency for some future date.
ate for a particular day.
for a particular day.
A, a Mexican customer.
n 30 days.

ate is $0.09 per 1 peso

•A Inc., a U.S. company, makes a sale and ships goods to B, SA, a Mexican customer.
•Sales price is $100,000 (U.S.) and A allowsB to pay in pesos in 30 days.
•The current exchange rate is $0.105 per 1 peso in day 1
Suppose in 30 days the exchange rate is $0.11 per 1 peso

Accounts Receivable $100,000

Sales $100,000

Company B need to pay how much in Peso?

$0.105

Company have to pay 952,381 Peso

How much in US dolar does Company A receive?

0.11 USD
104,761.90

orgeign exchange gain 4,761.90

Bank/Cash 104,761.90
Foreign exchange gain 4,761.90
Accounts Receivable $100,000

Bank/Cash $100,000
Accounts Receivable $100,000

Bank/Cash 4,761.90
Foreign exchange gain 4,761.90

1 USD 23.35 VND 1 VND 0.0428265525 USD

1 USD 23.25 VND 1 VND 0.0430107527 USD

VND Appreciates

SA, a Vietnamese supplier.

Vietnam dong in 30 days.
SA, a Vietnamese supplier.
Vietnam dong in 30 days.
ican customer.
PROBLEM 1

On October 1,2019, Vin Company (Vietnam) purchases inventory from a foreign supplie
(Japan) for 40,000 JPY. Payment will be made in 30 days.
Required: Prepare all journal entries for Vin Company in connection with the purchase
payment. The following exchange rates for 1 JPY apply:
Note: Round percentages to two decimals place.
Case 1 Case 1:
Date JPY per VND
October 1,2019 210.54
October 30,2019 212.67

Case 2
Date JPY per VND
October 1,2019 210.54
October 30,2019 212.67

PROBLEM 2
On September 1, Year 1, Keefer Company (U.S) received an order to sell
a machine to a customer in Canada at a price of 100,000 U.S dollars. The
machine was shipped on September 15, Year 1 and payment was
received on October 15, Year 1. The following spot exchange rates apply:

Case 1
Date USD/CAD
September 1,2019 1.39
September 15,2019 1.40
October 15,2019 1.41

Case 2
Date USD/CAD
September 1,2019 1.39
September 15,2019 1.40
October 15,2019 1.38

Required: Prepare all journal entries for Keefer Company (U.S) in connection with the selling and p
Note: Round percentages to two decimals place.
from a foreign supplier

on with the purchase and

on with the selling and payment.