The lower-of-cost-or-market LCM method is an inventory costing method that values inventory at the lower of its historical cost or its current market replacement cost. The term cost refers to historical cost of inventory as determined under the specific identification, FIFO, LIFO, or weighted-average inventory method.
The basic assumption of the LCM method is that if the purchase price of an item has fallen, its selling price also has fallen or will fall. The LCM method has long been accepted in accounting. Under LCM, inventory items are written down to market value when the market value is less than the cost of the items. The company must recognize the loss in the period the loss occurred. Navigation Standards. Navigation International Accounting Standards. Quick Article Links.
Overview IAS 2 Inventories contains the requirements on how to account for most types of inventory. Scope Inventories include assets held for sale in the ordinary course of business finished goods , assets in the production process for sale in the ordinary course of business work in process , and materials and supplies that are consumed in production raw materials.
When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change commodity brokers and dealers who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change.
The classifications depend on what is appropriate for the entity carrying amount of any inventories carried at fair value less costs to sell amount of any write-down of inventories recognised as an expense in the period amount of any reversal of a write-down to NRV and the circumstances that led to such reversal carrying amount of inventories pledged as security for liabilities cost of inventories recognised as expense cost of goods sold.
IAS 2 acknowledges that some enterprises classify income statement expenses by nature materials, labour, and so on rather than by function cost of goods sold, selling expense, and so on. Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an entity to disclose operating costs recognised during the period by nature of the cost raw materials and consumables, labour costs, other operating costs and the amount of the net change in inventories for the period.
Related Publications Deloitte comment letter on tentative agenda decision on costs necessary to sell inventories 14 Apr Deloitte e-learning — IAS 2 18 Oct Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads.
Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Raw Materials : When you are expecting to sell the finished goods either at the cost or above the raw materials expense, then you are not supposed to write down the raw materials cost.
Hedges : When there is hedging of inventory by a fair value hedge, then adding the hedges effects to the inventory's cost is necessary because it removes the need for market adjustment or lower price. Recovery : You can avoid a write-down to LCM if there is evidence that before selling the inventory, the market prices will increase.
Sales incentives : If there is a loss on an items sales resulting from unexpired sales incentives, it is an indication that there could be a market problem with the object or a lower cost. Written by Jason Gordon Updated at September 23rd, Contact Us If you still have questions or prefer to get help directly from an agent, please submit a request.
Please fill out the contact form below and we will reply as soon as possible. Academic Research on Lower of Cost or Market Method The impact of standard setting on relevance and reliability of accounting information: lower of cost or market accounting reforms in China , Yang, Z.
In the era , China applied many new asset rules that makes the lower of cost or LCM for assets which are noncash. The paper studies the link of the value of net assets to the market value of capital and the link of accounting revenues with the inventory return on the basis of HCA Historical Cost Accounting and LCM. A model that controls the impacts of year and industry effects are named as Fixed Effects Model.
It is used in the sample of a balanced panel. Its regressions indicate high explanatory power. The comparative evaluations of non-nested overlapping model famous as J and Cox measure the reliability. LCM reforms are related but the reliability doesnt increase. Chicago Booth Research Paper 10 , 6. This paper investigates the data in MtM Mark-to-Market and from where it comes. Measuring reporting conservatism , Givoly, D. The Accounting Review , 82 1 , This paper presents a review of accounting in the perspective of estimating the conservatism in reporting.
Control of international joint ventures , Groot, T.
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