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Inventory accounting is one of the busiest accounting activities as a company’s inventory may be its second largest asset behind human capital. IFRS inventory accounting has specific guidelines a company must follow in order to properly maintain the value of goods on the accounting ledger. A few universal guidelines for most companies with inventory include measuring inventory at cost, writing down inventory to net realizable value, and making disclosures about inventory accounting practices. Other IFRS inventory accounting guidelines fall in with IFRS revenue accounting guidelines. The guidelines for this accounting practice relate more to revenue recognition, which is a different topic for accounting purposes.
Companies need to record inventory at historical cost or what the original purchase price was for the goods. Other costs recorded in the IFRS inventory account include taxes, freight, handling, costs to convert raw materials into sellable inventory, and similar costs that place inventory into a certain location or sellable state. All these costs should be net of purchase price discounts received when purchasing inventory because the discounts lower the amount paid for the goods. Proper historical cost is critical for IFRS inventory as a company can easily attempt to increase its book value through fictitious inventory values. External audits typically review this account heavily in order to ensure the accuracy and validity of inventory balances in the accounting ledger.
Net realizable value is a method IFRS inventory accounting guidelines use to ensure accuracy for a company’s inventory. For accounting purposes, the net realizable value is the estimated selling price less estimates for the cost of completion or cost estimates for activities necessary to sell the inventory. When a company needs to make an inventory write-down, the result is an expense posted to the income statement. Though called an expense, the amount actually goes into the company’s cost of goods sold account. A reversal is possible for net realizable value, with the entry being the opposite of the one described above.
Disclosures represent statements made in addition to the financial statements released for use by stakeholders. IFRS inventory guidelines require disclosures on inventory accounting policy, carrying amount, and fair value carrying amount in addition to inventory write-downs, net realizable reversals, inventory carried as collateral, and cost of inventories recognized as an expense. Other disclosures may also be necessary, but these are the ones that relate to inventory. Companies should check with a licensed accountant on IFRS inventory accounting in order to ensure their financial statements are accurate and valid.
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