IFRS Notes

Lower of cost or market: Example 2

Example 2: When current replacement cost is in between upper and lower limits
Cost of inventory = $350
Selling price = $500
Costs of completion and disposal = $100
Normal profit margin = 10% of selling price
Current replacement cost = $370

Solution: U.S. GAAP
Current replacement cost = $370
NRV = $500 - $100 = $400
Upper limit = $400
Lower limit = $400 - $500 x 10% = $350
Since current replacement cost is between the upper and lower limits,
current replacement cost = market = $370
Lower of cost or market = $350
Cost = $350, Market = $370

Solution: IAS 2
Lower of cost and NRV = $350
Cost = $350, NRV = $400

Lower of cost or market: U.S. GAAP
(1) Inventories are valued at the lower of cost or market.
(2) Market = current replacement cost
Upper limit of market = net realizable value (NRV)
Lower limit of market = NRV - normal profit margin
NRV = estimated selling price - costs of completion and disposal

Lower of cost and NRV: IAS 2
(1) Inventories are measured at the lower of cost and net realisable value.