Impairment loss on property, plant and equipment
Under IFRS, impairment loss arises when the carrying amount of an asset surpasses its recoverable amount. The recoverable amount is estimated by the difference between the net selling price and the value in use. Further, the value in use is estimated by taking the sum of the present value of future cash flow that is expected from the use of assets and disposal. On the other hand, impairment of assets under the US GAAP occurs when the carrying amount of the asset surpasses the sum of undiscounted future cash flow that is expected from disposal and the continuous use of the asset (Perera & Doupnik, 2014). Therefore, it is evident that there is a difference in how the impairment of assets is determined.
There is a difference in how the impairment loss of an asset is determined under the two standards. In accordance with IFRS, an impairment loss is estimated by taking the difference between carrying and recoverable amount of the asset. On the other hand, the impairment loss under the US GAAP is the difference between the carrying amount and the fair value of the asset. Therefore, the difference between the two standards is the use of recoverable amount and fair value. In most cases, these two values are likely to be different (Wahlen, Jones & Pagach, 2015).
The two standards also differ on treatment of reversal of an impairment loss. For instance, under IFRS, the original value of impairment loss can be recognized if it can be established that the recoverable amount surpasses the new estimated value of the carrying amount. On the other hand, the reversal of impairment loss that was earlier recognized cannot be reversed (Harrison, Horngren & Thomas, 2014).
Calculation of closing inventory
The table presented below shows the calculations of the amount at which the inventory should be reported at the end of the year.
IFRS
Based on IAS 2, measurement of carrying amount of inventory is done by taking the lower of costs or net realizable value (Weil, Schipper & Francis, 2013).
U.S. GAAP
Under U.S. GAAP, the carrying amount of inventory is measured at the lower cost of market value. The market value is the same as the replacement cost. In this case, the net realizable value is the ceiling while the net of net realizable value and normal profit is the floor as indicated in the calculations above (Collier, 2010). This explains why inventory is written down to replacement cost.
IFRS
U.S. GAAP
Impact on income
Based on the calculations above, it can be noted that IFRS generates a lower inventory loss than the US GAAP. Therefore, it will result in a larger amount of income before taxes in Year 1 by $1,000. However, in Year 2, the IFRS will result in smaller income before tax by the same amount. At the end of the second year, both standards will generate the same amount of income before taxes (Brigham & Michael, 2009).
References
Brigham, E., & Michael, J. (2009). Financial management theory and practice. USA: South-Western Cengage Learning.
Collier, P. (2010). Accounting for managers. USA: John Wiley & Sons.
Harrison, W., Horngren, C., & Thomas, C. (2014). Financial accounting. USA: Pearson Education.
Perera, H., & Doupnik, T. (2014). International accounting. USA: McGraw-Hill Education.
Wahlen, J., Jones, J., & Pagach, D. (2015). Intermediate accounting: reporting and analysis. USA: Cengage Learning.
Weil, R., Schipper, K., & Francis, J. (2013). Financial accounting: An introduction to concepts, methods and uses. USA: Cengage Learning.