Get Instant Help From 5000+ Experts For
question

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing:Proofread your work by experts and improve grade at Lowest cost

And Improve Your Grades
myassignmenthelp.com
loader
Phone no. Missing!

Enter phone no. to receive critical updates and urgent messages !

Attach file

Error goes here

Files Missing!

Please upload all relevant files for quick & complete assistance.

Guaranteed Higher Grade!
Free Quote
wave

Traditional Accounting Approach for Inventories

The Conceptual Framework (CF) of the International Accounting Standard Board (IASB) has brought some major changes in the way the key accounting elements like inventories, Property Plant & Equipment (PPE) and others were accounted for under the traditional accounting approach. As a result, as bought by the IASB’s CF, these changes have created some key impacts on accounting and financial reporting standards. The main aim of this report is to differentiate the accounting treatments for Inventories and PPE under the traditional or pre-IASB CF approach and the main ideas of IASB CF.

Under the traditional accounting approach, inventory valuation, including Cost of Goods Sold (COGS), is done using three approaches which are weighted-average cost method, First-in, First-Out (FIFO), and Last-in, First-Out (LIFO) (Simeon and John 2018). The weighted-average cost method determines the value of inventories by dividing the available COGS for sales by the number of those units still on the shelf. Under the FIFO method, the cost of the oldest inventory is ascertained, and it is multiplied by the amount of inventory sold. Under the LIFO method, the cost of the most recent inventories is ascertained, and the cost is multiplied by the amount of inventory sold (Simeon and John 2018).

Under the traditional accounting approach, the accounting for PPE is undertaken based on the historical cost method. It is an accounting method in which a company records the PPE listed on the financial statements on the basis of the price at which the company originally purchased them. This method is grounded on the past transactions of a company, and it is an easy to calculate and reliable method. However, there is doubt on the relevance of the historical cost of the PPE at a later point in time (Drake, Roulstone and Thornock 2016).

If the main ideas of the IASB CF were used, the accounting for inventories would be done using the methods of specific identification, FIFO and weighted-average cost method (cfainstitute.org 2022). The specific identification method is related to the valuation of inventory, precisely to keep track of inventory’s specific item and to assign cost individually rather than grouping items together. The weighted-average cost method ascertains the value of inventories by dividing the available COGS for sales by the number of those units still on the shelf. As per the FIFO method, the cost of the oldest inventory is determined, and it is multiplied by the amount of inventory sold (cfainstitute.org 2022).

If the main ideas of the IASB CF were used, PPE would be valued under either in historical cost method or the current value method (ifrs.org 2022). The current value method includes fair value measurement, value-in-use and fulfilment value, and the current cost method. Measuring the PPE under the fair value method would require a company to measure these assets at the present market value (ifrs.org 2022). Value-in-use can be referred to as the net present value of the cash flows that the PPE generates as the company is correctly using it. The current cost of the PPE refers to the cost of an equal PPE at the date of measurement (ifrs.org 2022).  

Traditional Accounting Approach for PPE

As per IAS 2 Inventories (IAS 2), the companies are required to state the inventories at the lower of cost and bet realisable value (NRV). Therefore, the value of inventories needs to be reported in the statement of financial position (ifrs.org 2022). When the companies sell the inventories, they should recognise the carrying value of those inventories as an expense in the period when they recognise the revenue. Such expense needs to be reported in the income statement. IAS 2 requires the companies to disclose specific information on inventories such as accounting policies, inventories’ carrying value, inventories’ carrying value at fair value less costs of selling, and the amount of inventories that the companies recognise as an expense during the period (iasplus.com 2022).

As per IAS 16 Property, Plant and Equipment (IAS 16), the companies need to initially measure the PPE at cost. After the initial recognition, the companies can use either the cost model or revaluation model (ifrs.org 2022). IAS 16 requires the companies to charge depreciation on PPE using either of the straight-line methods, diminishing balance method, and units of production method. IAS 36 Impairment of Assets needs to be applied to ascertain whether there is impairment of an item in PPE (iasplus.com 2022). Aspects that should be disclosed include the measurement bases used, depreciation method used, assets’ useful lives, the gross carrying amount, and reconciliation of carrying amount (iasplus.com 2022).

Therefore, it can be seen that the CF influenced accounting techniques to predominate today. It is because of the inclusion of other measurement techniques to value inventories and PPE to provide more precise information (Kabir and Rahman 2018).

The IASB CF’s approach is different from the ‘traditional’ accounting because it has introduced new measurement techniques for the financial elements so that the financial statements can reflect more accurate information on the entities’ financial performance and position. For example, a historical cost basis is used to value PPE under the traditional approach, and this measurement base lacks relevance in the present time. To address this issue, current value measurement bases have been introduced by the IASB CF (iasplus.com 2022). The aim is to provide the preparers with the necessary assistance in developing consistent accounting policies and standards based on consistent concepts.

Conclusion

The above analysis shows that the accounting for inventories and PPE under the traditional accounting approach is different from the accounting under the IASB CF. The CF-influenced approach has introduced some new measurement bases and other requirements to ensure providing the most relevant information on these elements. It helps the users of the financial statements understand a company’s financial performance and financial position in a better manner.

References

Drake, M.S., Roulstone, D.T. and Thornock, J.R., 2016. The usefulness of historical accounting reports. Journal of Accounting and Economics, 61(2-3), pp.448-464.

IAS 16 — Property, Plant and Equipment 2022. Available at: https://www.iasplus.com/en/standards/ias/ias16 (Accessed: 11 March 2022).

IAS 2 — Inventories 2022. Available at: https://www.iasplus.com/en/standards/ias/ias2#link7 (Accessed: 11 March 2022).

IAS 36 — Impairment of Assets (2022). Available at: https://www.iasplus.com/en/standards/ias/ias36 (Accessed: 11 March 2022).

Ifrs.org. 2022. Conceptual Framework for Financial Reporting. Available at: https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2021/issued/part-a/conceptual-framework-for-financial-reporting.pdf (Accessed: 11 March 2022).

Inventories 2022. Available at: https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/inventories (Accessed: 11 March 2022).

Kabir, H. and Rahman, A., 2018. How Does the IASB Use the Conceptual Framework in Developing IFRSs? An Examination of the Development of IFRS 16 Leases. Journal of Financial Reporting, 3(1), pp.93-116.

Simeon, E.D. and John, O., 2018. Implication of choice of inventory valuation methods on profit, tax and closing inventory. Account and Financial Management Journal, 3(7), pp.1639-1645.

Standards, I., Navigator, I. and IAS 16 Property, P. 2022. IFRS - IAS 16 Property, Plant and Equipment, Ifrs.org. Available at: https://www.ifrs.org/issued-standards/list-of-standards/ias-16-property-plant-and-equipment/ (Accessed: 11 March 2022).

Standards, I., Navigator, I. and Inventories, I. 2022. IFRS - IAS 2 Inventories, Ifrs.org. Available at: https://www.ifrs.org/issued-standards/list-of-standards/ias-2-inventories/ (Accessed: 11 March 2022).

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2022). Essay: Accounting Treatments For Inventories And PPE: Traditional Vs IASB CF.. Retrieved from https://myassignmenthelp.com/free-samples/acf212-principles-of-financial-accounting/traditional-accounting-approach-file-A1DD302.html.

"Essay: Accounting Treatments For Inventories And PPE: Traditional Vs IASB CF.." My Assignment Help, 2022, https://myassignmenthelp.com/free-samples/acf212-principles-of-financial-accounting/traditional-accounting-approach-file-A1DD302.html.

My Assignment Help (2022) Essay: Accounting Treatments For Inventories And PPE: Traditional Vs IASB CF. [Online]. Available from: https://myassignmenthelp.com/free-samples/acf212-principles-of-financial-accounting/traditional-accounting-approach-file-A1DD302.html
[Accessed 15 July 2024].

My Assignment Help. 'Essay: Accounting Treatments For Inventories And PPE: Traditional Vs IASB CF.' (My Assignment Help, 2022) <https://myassignmenthelp.com/free-samples/acf212-principles-of-financial-accounting/traditional-accounting-approach-file-A1DD302.html> accessed 15 July 2024.

My Assignment Help. Essay: Accounting Treatments For Inventories And PPE: Traditional Vs IASB CF. [Internet]. My Assignment Help. 2022 [cited 15 July 2024]. Available from: https://myassignmenthelp.com/free-samples/acf212-principles-of-financial-accounting/traditional-accounting-approach-file-A1DD302.html.

Get instant help from 5000+ experts for
question

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing: Proofread your work by experts and improve grade at Lowest cost

loader
250 words
Phone no. Missing!

Enter phone no. to receive critical updates and urgent messages !

Attach file

Error goes here

Files Missing!

Please upload all relevant files for quick & complete assistance.

Plagiarism checker
Verify originality of an essay
essay
Generate unique essays in a jiffy
Plagiarism checker
Cite sources with ease
support
Whatsapp
callback
sales
sales chat
Whatsapp
callback
sales chat
close