Inventory revaluation under GAAP and IFRS follows the same basic instinct — inventory should not sit on the balance sheet above what it can recover — but the two frameworks apply that instinct differently. GAAP uses two measurement rules depending on the cost flow method a company uses, and once a write-down is booked, it stays booked. IFRS applies one rule to everyone and lets companies reverse a prior write-down when the conditions that caused it go away. For the same set of facts, those differences can produce meaningfully different income statements.
The Core Differences at a Glance
Three things separate the two frameworks, and each one shows up on the financial statements.
- Measurement rule. GAAP splits companies in two. FIFO and average-cost users apply Lower of Cost or Net Realizable Value (LCNRV). LIFO and retail-method users apply the older Lower of Cost or Market (LCM). IFRS applies LCNRV to everyone.
- Reversals. GAAP does not allow a write-down to be reversed, ever. IFRS allows reversal up to the original cost when the circumstances that caused the write-down no longer exist.
- Cost flow methods. GAAP permits LIFO. IFRS prohibits it, allowing only FIFO, weighted average, and specific identification.
The rest of the differences flow from those three.
How GAAP Measures Inventory
ASC 330 governs inventory measurement under US GAAP, and the applicable rule depends on the cost flow assumption. FASB simplified the rule for most companies with ASU 2015-11 but deliberately carved out LIFO and retail-method users.1Financial Accounting Standards Board. ASU 2015-11 Inventory Topic 330
LCNRV for FIFO and Average Cost
Companies using FIFO or average cost apply LCNRV. Net realizable value is the estimated selling price minus the costs to complete the goods and the costs to sell them. A product expected to sell for $100, needing $5 in finishing work and $10 in sales commissions, has an NRV of $85. If original cost exceeds NRV, the inventory is written down to NRV. If cost is lower, nothing happens.
LCM for LIFO and the Retail Method
LIFO and retail-method users must still apply the older LCM test. LCM involves three numbers: a ceiling (NRV), a floor (NRV minus a normal profit margin), and current replacement cost. The middle value of the three becomes “market,” and inventory is carried at the lower of cost or that market figure. The ceiling prevents carrying inventory above what it can fetch on sale; the floor prevents writing it down so far that a later sale generates an artificially inflated profit.
Once Written Down, It Stays Down
Under either rule, the lower amount becomes the new cost basis permanently. If a company writes inventory down by $50,000 in one quarter and the market fully recovers the next quarter, the company cannot write it back up. The loss stays on the books. This one-way ratchet is the sharpest single difference from IFRS.
How IFRS Measures Inventory
IAS 2 requires all inventory to be measured at the lower of cost and net realizable value, regardless of cost flow method.2IFRS. IAS 2 Inventories There is no LCM rule, no ceiling-and-floor calculation, no split based on cost flow. Every company runs the same test: if NRV falls below cost, write inventory down to NRV. The NRV definition is the same one used under GAAP — estimated selling price less estimated completion and selling costs.3International Financial Reporting Standards (IFRS). IAS 2 Inventories
IAS 2 permits only FIFO, weighted average, and specific identification. LIFO is not available. A company transitioning from GAAP to IFRS that currently uses LIFO faces both a method change and a potential inventory revaluation.
Reversals: The Biggest Practical Gap
Under IFRS, if a product was written down because a competitor launched a cheaper alternative and that competitor later exits the market, NRV may recover. The company reverses some or all of the original write-down.2IFRS. IAS 2 Inventories The reversal has a hard cap: the new carrying amount cannot exceed the inventory’s original cost. You can recover ground, not gain it.
A reversal reduces cost of goods sold in the period it happens, which directly lifts reported gross profit and net income. Under GAAP, that same recovery is invisible in earnings.
For analysts building comparable models across the two frameworks, this asymmetry matters. A period of price volatility can produce a write-down and a later reversal for an IFRS reporter, showing up as an earnings dip followed by an earnings bump. A GAAP reporter facing identical facts shows the dip but never the bump. Same business reality, different reported trend.
What Triggers a Write-Down Under Either Framework
The events that force a revaluation are broadly the same under both frameworks. Physical deterioration — damage, spoilage, corrosion, shelf wear — reduces value in proportion to the damage. Obsolescence hits when a new product generation makes the prior version unsellable at its original price; consumer electronics, fashion, and medical devices see this constantly. A general decline in market prices does the same, whether the cause is a competitor undercutting the selling price, an industrywide drop in raw material costs, or a rise in the costs of completing or selling the goods.
Recording the Entry
Two approaches are available for the accounting entry itself, and the choice affects how visible the write-down is on the face of the financial statements.
Direct Method
The direct method folds the loss into cost of goods sold. A $50,000 write-down is a debit to cost of goods sold and a credit to inventory. Simple, but the impairment disappears into the normal cost of sales line, and readers cannot easily see how much of the period’s reduced profit came from an impairment rather than ordinary operations.
Allowance Method
The allowance method credits a contra-asset (often “Allowance to Reduce Inventory to NRV”) and debits a separate “Loss on Inventory Write-Down” expense. The loss appears as its own income statement line, and the balance sheet shows gross inventory alongside the allowance, so a reader sees both original cost and cumulative impairment. Gross inventory of $500,000 with a $50,000 allowance nets to $450,000.
Immaterial adjustments usually flow through cost of goods sold. Material impairments are more likely to be broken out.
Reversal Entry Under IFRS
An IFRS reversal mirrors the original entry. A $30,000 reversal debits inventory and credits cost of goods sold, reducing that period’s cost of sales and increasing gross profit. The cap holds: the post-reversal carrying value cannot exceed original pre-write-down cost.
Disclosure Differences
Both frameworks want inventory impairments visible to investors, but they require different disclosures.
Under US GAAP, SEC registrants follow Regulation S-X, which requires disclosure of the major inventory classes (finished goods, work in process, raw materials, supplies), the basis for measurement, and the cost flow method.4eCFR. 17 CFR Part 210 – Form and Content of Financial Statements LIFO users must also disclose the excess of replacement or current cost over the stated LIFO value when material. Management Discussion and Analysis must describe unusual events materially affecting reported income, including inventory adjustments, and must flag known events reasonably likely to cause a material change in the cost-to-revenue relationship, such as anticipated write-downs.5eCFR. 17 CFR 229.303 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Under IFRS, IAS 2 requires disclosure of the measurement policy, total carrying amount, the write-down expense recognized in the period, and the amount of any reversal recognized as a reduction of expense, along with the circumstances that caused the reversal.3International Financial Reporting Standards (IFRS). IAS 2 Inventories The reversal disclosure has no GAAP counterpart because GAAP has no reversals to disclose.
Tax Treatment Is a Separate Question
The book write-down and the tax deduction are governed by different rules and do not automatically produce the same number. Federal tax rules for LCM define “market” based on aggregate current bid prices for the basic cost elements of inventory on hand — direct materials, direct labor, and required indirect costs.6GovInfo. 26 CFR 1.471-4 – Inventories at Cost or Market, Whichever Is Lower Damaged, obsolete, or subnormal goods can be valued at actual selling price minus direct disposal costs, but the taxpayer carries the burden of proof and must document that the goods qualify and that the prices used reflect actual sales.7eCFR. Inventories LIFO taxpayers face the LIFO conformity rule: LIFO for tax means LIFO for books. A LIFO taxpayer may apply LCM for book purposes without breaking conformity, but the tax return must use actual LIFO cost, so a book write-down does not automatically translate into a matching tax deduction.8IRS. Practice Unit – LIFO Conformity