Inventory accounting - FIFO vs LIFO - Is this disclosed in ARs?

With regard to inventory, most companies state in their AR that its "At lower of cost or market", and that its at a weighted average cost basis

Is this now the norm? The weighted average cost basis vs FIFO/LIFO?

(04-01-2015, 05:05 PM)GFG Wrote: With regard to inventory, most companies state in their AR that its "At lower of cost or market", and that its at a weighted average cost basis

Is this now the norm? The weighted average cost basis vs FIFO/LIFO?

Hi, in Singapore yes,

Under FRS 2: Inventories -

" The financial statements shall disclose:
(a) the accounting policies adopted in measuring inventories, including the cost
formula used;"

It should have been disclosed under the notes to accounts in the annual report.

Under lower of cost or market value is pretty standard, as if the inventories are below cost, they need to 'write down' to market value.

Whether it is the norm a not, it might be a good idea to look at the accounting policy of the companies' competitors as well.

(04-01-2015, 05:21 PM)dowz Wrote:

(04-01-2015, 05:05 PM)GFG Wrote: With regard to inventory, most companies state in their AR that its "At lower of cost or market", and that its at a weighted average cost basis

Is this now the norm? The weighted average cost basis vs FIFO/LIFO?

Hi, in Singapore yes,

Under FRS 2: Inventories -

" The financial statements shall disclose:
(a) the accounting policies adopted in measuring inventories, including the cost
formula used;"

It should have been disclosed under the notes to accounts in the annual report.

Under lower of cost or market value is pretty standard, as if the inventories are below cost, they need to 'write down' to market value.

Whether it is the norm a not, it might be a good idea to look at the accounting policy of the companies' competitors as well.

Just to add, LIFO is not allowed under FRS, but allowed under GAAP.

Lower value of Oil Inventories/ Valuation and Impact on Results

Can anyone explain to me how lower oil prices impact valuation of inventories and how this is handled from an accounting standpoint?

As I understand it, lower inventory valuations caused by the drop in oil prices would be recorded via the income statement

as a loss and thus reduce EPS.Or is it possible to treat this via the balance sheet and record this simply as a lower NAV?

PGL

(04-01-2015, 06:55 PM)PGL Wrote: Lower value of Oil Inventories/ Valuation and Impact on Results

Can anyone explain to me how lower oil prices impact valuation of inventories and how this is handled from an accounting standpoint?

As I understand it, lower inventory valuations caused by the drop in oil prices would be recorded via the income statement

as a loss and thus reduce EPS.Or is it possible to treat this via the balance sheet and record this simply as a lower NAV?

PGL

This depends on whether its recorded using LIFO,FIFO or Ave cost
If it's LIFO, if you bought a barrel of oil 2 years ago for $100 and most recently, another barrel for $80, and you sold 1 barrel for $60, then you have to record $20 as a loss (not $40). yes, it shows up on the income statement ultimately and does reduce EPS.
If its FIFO, then your loss is $40, but the remaining barrel of oil is recorded in your BS as $80.
If it's average cost (which I think is the case for most sgx listed companies with similar/commodity like inventories), then your ave cost is $100+80 divided by 2 = $90.
Then your loss is $30.
all will show up in income statement.

(04-01-2015, 06:04 PM)csl123 Wrote:

(04-01-2015, 05:21 PM)dowz Wrote:

(04-01-2015, 05:05 PM)GFG Wrote: With regard to inventory, most companies state in their AR that its "At lower of cost or market", and that its at a weighted average cost basis

Is this now the norm? The weighted average cost basis vs FIFO/LIFO?

Hi, in Singapore yes,

Under FRS 2: Inventories -

" The financial statements shall disclose:
(a) the accounting policies adopted in measuring inventories, including the cost
formula used;"

It should have been disclosed under the notes to accounts in the annual report.

Under lower of cost or market value is pretty standard, as if the inventories are below cost, they need to 'write down' to market value.

Whether it is the norm a not, it might be a good idea to look at the accounting policy of the companies' competitors as well.

Just to add, LIFO is not allowed under FRS, but allowed under GAAP.

Any idea why so?
From what I understand, LIFO smoothens out the earnings over a period of time, that is, you don't account for extraordinary gains/losses by booking in the changes in the value of your inventory bought previously.
FIFO is logical for most companies (you try to sell off the older stock first) but you end up with big fluctuations.
ave weighted cost seems the most logical and fair IMO although it means the inventory carried in the BS is not a true reflection of it's current cost.
Am I right to say this?

(04-01-2015, 06:55 PM)PGL Wrote: Lower value of Oil Inventories/ Valuation and Impact on Results

Can anyone explain to me how lower oil prices impact valuation of inventories and how this is handled from an accounting standpoint?

As I understand it, lower inventory valuations caused by the drop in oil prices would be recorded via the income statement

as a loss and thus reduce EPS.Or is it possible to treat this via the balance sheet and record this simply as a lower NAV?

PGL

Hi PGL,

Hyperion and Tree here.

The Singapore Financial Reporting Standards to be applied after 1 Jan 2014, for inventories, is call FRS 2 and can be found at the Accounting Standards Council Singapore's website for free.

Assume that Hyperion runs a oil trading company call Hyper Bad Luck Oil Trading Company, and the company holds inventory before selling to clients. Let's say Hyperion buys the 10 barrels of shipping bunkering oil from Mr Tree at USD100 per barrel from Tapis in Malaysia and transport to his Singapore bunker at transport cost of USD10 per barrel. Tree says since you such a good loyal customer and buy so much volume, I give you USD5 discount per barrel. Singapore custom say I wana tax your oil at USD3 per barrel. Page 8 of FRS 2, para 10 says cost of inventory shall compromise the costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their location and condition.

The cost of inventory is 10 x (100+10-5+3)= USD 1080

Since Hyperion has a customer and he thinks he can sell to the customer at USD 1200 which is the net realisable value, he record in balance sheet the inventory at cost which is USD 1080 because he is suppose to record at lower of cost(USD1080) or net realisable value(USD1200).

Unfortunately since then, oil price drop till USD60 per barrel. His customer say I won't pay you USD1200, because I can just buy from Tapis Malaysia at 10X(60+10+3) = USD730 with USD60 per barrel, USD10 transportation costs, and USD3 pay to Singapore custom within 3 weeks. So his customer says I only willing to buy from you now at USD 750 which has a USD20 premium for immediate availability of oil. Hyperion has to write down his oil inventory to USD 750.

Debit Impairment loss on inventory SGD 330 (Expense into P&L)
Credit Oil Inventory in bunker SGD 330 (Balance Sheet Inventory reduce value)

In page 12, para 34 says write down of inventory to net realisable value shall be recognised as an expense in the period of write down. So I guess it means going into the P&L with no excuses. So it is unlikely that a company can treat this via the balance sheet simply as a lower NAV without a corresponding line item in P&L.

Thus, EPS and NAV would be reduced.

(04-01-2015, 10:12 PM)GFG Wrote:

(04-01-2015, 06:04 PM)csl123 Wrote:

(04-01-2015, 05:21 PM)dowz Wrote:

(04-01-2015, 05:05 PM)GFG Wrote: With regard to inventory, most companies state in their AR that its "At lower of cost or market", and that its at a weighted average cost basis

Is this now the norm? The weighted average cost basis vs FIFO/LIFO?

Hi, in Singapore yes,

Under FRS 2: Inventories -

" The financial statements shall disclose:
(a) the accounting policies adopted in measuring inventories, including the cost
formula used;"

It should have been disclosed under the notes to accounts in the annual report.

Under lower of cost or market value is pretty standard, as if the inventories are below cost, they need to 'write down' to market value.

Whether it is the norm a not, it might be a good idea to look at the accounting policy of the companies' competitors as well.

Just to add, LIFO is not allowed under FRS, but allowed under GAAP.

Any idea why so?
From what I understand, LIFO smoothens out the earnings over a period of time, that is, you don't account for extraordinary gains/losses by booking in the changes in the value of your inventory bought previously.
FIFO is logical for most companies (you try to sell off the older stock first) but you end up with big fluctuations.
ave weighted cost seems the most logical and fair IMO although it means the inventory carried in the BS is not a true reflection of it's current cost.
Am I right to say this?

Hi,

I wouldn't agree that LIFO smooths out earnings. It distorts earnings more likely. Reason being that the cost of older inventory may be perpetually stuck within the books, until these are "flushed out" through a sale or write down. The effect of the distortion is more significant with larger inventory holdings. Distortion can work both ways, depending on the value of the most recent "Last In" stocks. Just like one's latest.... job (no offense intended. apologies for the lack of a better analogy), having similar effects. One may do badly in the latest job, but that is (by no means) indicative of one's work competence.

For the reader, the inventory figure (derived from LIFO) may not reflective of the economic reality that the goods have aged and may run a higher risk of being sold below cost, especially if these are not captured by the rule of lower of cost or market value.

For earnings smoothing, I think weight average cost does a better job than LIFO and FIFO, especially since its more likely harder for inventory costs to spike due to one batch having significantly higher or lower costs.

For business which has no significant change in its operating activities, weighted average gives better comparability of margins from period to period, while keeping out the effects of inventory cost spikes.

Just my view.

(04-01-2015, 10:12 PM)GFG Wrote:

(04-01-2015, 06:04 PM)csl123 Wrote:

(04-01-2015, 05:21 PM)dowz Wrote:

(04-01-2015, 05:05 PM)GFG Wrote: With regard to inventory, most companies state in their AR that its "At lower of cost or market", and that its at a weighted average cost basis

Is this now the norm? The weighted average cost basis vs FIFO/LIFO?

Hi, in Singapore yes,

Under FRS 2: Inventories -

" The financial statements shall disclose:
(a) the accounting policies adopted in measuring inventories, including the cost
formula used;"

It should have been disclosed under the notes to accounts in the annual report.

Under lower of cost or market value is pretty standard, as if the inventories are below cost, they need to 'write down' to market value.

Whether it is the norm a not, it might be a good idea to look at the accounting policy of the companies' competitors as well.

Just to add, LIFO is not allowed under FRS, but allowed under GAAP.

Any idea why so?
From what I understand, LIFO smoothens out the earnings over a period of time, that is, you don't account for extraordinary gains/losses by booking in the changes in the value of your inventory bought previously.
FIFO is logical for most companies (you try to sell off the older stock first) but you end up with big fluctuations.
ave weighted cost seems the most logical and fair IMO although it means the inventory carried in the BS is not a true reflection of it's current cost.
Am I right to say this?

In an inflationary environment, LIFO reduces tax burden of the company as the cost of goods sold is higher for LIFO when compared to FIFO.

In fact it is more important that the closing inventory is being valued with a prudent practice, ie. lower of cost or net realisable value. If we found that closing inventory is overvalued because of obsolete or reduction in raw material prices, then an impairment or written off is necessary. Undervalued inventory is however fine in normal circumstances. What make FIFO method popular is because with FIFO, the closing inventory are being recognised at the latest purchase price which means less possibility undervaluing/overvaluing the inventory. However with LIFO method, depending the type of trades, it may result in significant undervalued closing inventory, which could therefore means "temporary" lower profit, lower tax paid. That's the reason why in Singapore, we follow IAS and disallow the LIFO method.