As a result, the costs of the newest items purchased will flow into the costs of goods sold first, as if the items purchased most recently were sold first. Under LIFO, the newest goods that are purchased or manufactured are presumably sold first while the oldest goods to be purchased or manufactured are assumed to remain in inventory. The last in, first out (LIFO) method can also be used to assign costs under US GAAP, but not under IFRS. Under the weighted average cost method, the average costs of goods available for sale are assigned to the units sold and the units remaining in inventory. As a result, the ending inventory would include the most recent purchases. This implies that the items that were purchased first are sold first. The cost of goods in the beginning inventory and the cost of the first items purchased or manufactured flow into the cost of goods sold first. The FIFO method assumes that the oldest goods that are purchased or manufactured are sold first while the newest goods purchased or manufactured remain in inventory. IFRS and US GAAP, however, permit the use of the first in, first out (FIFO) method, and the weighted average cost method to assign costs. Under the specific identification method, the inventory and cost of goods sold are based on their physical flow. Matching Applied to Inventory and Cost of Goods Sold Period costs are expenditures that less directly match revenue, and are reflected in the period when a company has the expenditure or incurs a liability. Matching requires that a company recognizes the cost of goods sold in the same period as revenues from the sale of the goods. Under the matching principle, a company recognizes some expenses (for example, cost of goods sold) whenever the associated revenues are recognized, thereby matching expenses and revenues. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.The IASB Conceptual Framework describes expenses as “decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.” General Principles of Expense RecognitionĪ company recognizes expenses in the period that it consumes the economic benefits associated with the expenditure, or loses some previously recognized economic benefit.The present value of the sum of lease payments and any residual value guaranteed by the lessee that is not already reflected in lease payments equals or exceeds substantially all of the fair value of the underlying asset.However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion will not be used for lease classification purposes. The lease term is for the major part of the remaining economic life of the underlying asset.The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.If any of the following classification criteria are met, the lease is a finance lease. Under ASC 842, a lessee can have either a finance or operating lease. Transfers and servicing of financial assets Revenue from contracts with customers (ASC 606) Loans and investments (post ASU 2016-13 and ASC 326) Investments in debt and equity securities (pre ASU 2016-13) Insurance contracts for insurance entities (pre ASU 2018-12) Insurance contracts for insurance entities (post ASU 2018-12) IFRS and US GAAP: Similarities and differences Business combinations and noncontrolling interestsĮquity method investments and joint ventures
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