So once you have these two values calculated, historical cost and
fair market value, if historical cost is less than fair market value,
then the ending inventory stays at original cost.
You don't need to change anything, no adjusting entry is need.
You certainly don't write it up in value because it's lower of cost or market.
What you have to worry about is if this fair market value or
replacement value drops below historical cost,
then your ending inventory has to be valued at this replacement value.
So you need to do an adjusting entry to write down your inventory.
And it's essentially going to be debit, cost of goods sold for the amount of
the write-down, credit, inventory for the amount of the write-down.
So our inventory account on the balance sheet is going to drop to replacement
value, and then the amount of the write-down will show up as an additional
expense on the income statement.
Now one key international difference comes up here.
Under US GAAP, once inventory is written down to fair market value,
essentially that becomes the new historical cost.
It can't be later written up to its original cost if the market value
subsequently rises.
So the way to think about it is once you write it down that's the new
historical cost,
and then you start looking at historical cost versus future fair market values.
But under IFRS, if you write inventory down,
you can actually write it back up to the amount of the original cost.
You just can never write it over the original cost.
So one little difference that we haven't yet ironed out between US GAAP and IFRS.