Deliberate Accounting Manipulations: Expense-Oriented Accounting Gimmicks and Intentional Profit Understatements

The Value‐relevance of Fair Value Measurement for Inventories

“…However, inventories are measured at the lower of cost and net realisable value under IAS 2 (IASB 2003). Most inventories are measured at cost (Welc 2020) and the fair value of inventories is therefore not available as a measurement or a disclosure in the financial statements. Moreover, financial databases do not estimate the fair value of inventories.…”

“…To determine the lower bound, we note that the book value of inventories will be the lower of cost and net realisable value. In this respect, the vast majority of inventories are carried at cost and reporting a gross loss is rare (Welc 2020). It is possible that the fair value of inventories carried at net realisable value could be lower than their book value.…”

“…Under International Financial Reporting Standards (IFRS), IAS 2 determines that inventories are measured at the lower of cost and net realisable value (IASB 2003). As inventories are generally sold at a profit, the book value for the vast majority of inventories is equal to their cost (Welc 2020) and it is reasonable to say that the fair value of inventories is used for neither measurement nor disclosure in financial statements 1 . The book value of inventories, most frequently represented by cost, can be outdated and is influenced by factors like the choice of supplier and cost flow methods.…”

“…11There is an argument that both net realisable value and fair value could sometimes be developed from a common departure point, namely the expected selling price of inventories. However, neither measurement is generally available to users for inventories, most of which are measured at cost (Welc 2020). …”

“…22As most inventories are sold at a profit (Welc 2020), if optimal quantities of inventories are produced, write‐off of excess production is avoided. In turn, this increases the cumulative profitability of firms.…”