Inventory accounting: IFRS® Accounting Standards vs US GAAP

From the IFRS Institute – June 1, 2026

Authors: Valerie Boissou; Paulina Kumah

Inventory represents a significant asset for many companies, and judgments about which costs are capitalized and how they flow through inventory can materially impact key performance metrics, such as gross margin. Although IAS 2¹ and ASC Topic 330² share similar objectives, they differ in several important areas. This article summarizes the main differences of inventory accounting between the two standards and explains what those differences mean in practice.

Inventories are assets:

held for sale in the ordinary course of business (e.g. finished goods, merchandise purchased for resale);
in the process of production for such sale (i.e. work in progress); or
in the form of materials or supplies to be consumed in the production process or rendering of services (e.g. raw materials and packaging).

Commercial samples, returnable packaging, or equipment spare parts typically do not meet the definition of inventories, even though they are often managed using an inventory system for practical reasons.

Inventories are generally measured at the lower of cost and net realizable value (NRV)³. Cost includes purchase costs, production or conversion costs, and other costs incurred to bring inventory to its present location and condition. When items are not interchangeable or relate to specific projects, cost is measured for each item individually. When items are interchangeable, companies may apply cost formulas – i.e. first-in, first-out (FIFO) or weighted-average cost. Costing techniques – i.e. standard costing and the retail method – may be used if they approximate cost.

What are cost formulas?

Cost formula	Requirement
First in, first out	The FIFO formula assumes that items of inventory that were purchased or produced first are sold first. Therefore, the items remaining in inventory at the end of the period are those most recently purchased or produced.
Weighted average	Under the weighted-average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period.
Last in, first out	The LIFO formula assumes that items of inventory that were purchased or produced last are sold first. Therefore, the items remaining in inventory at the end of the period are made up of many periods of purchased or produced inventory (inventory layers). This formula is prohibited under IAS 2.

What are costing techniques?

Costing techniques	Requirement
Standard costing	Inventory is measured at the standard cost of each unit reflecting predetermined rates for the material, labor and overhead expenses at normal level of output and efficiency.
Retail method	Inventory is measured based on its selling price reduced by the relevant profit margin.

Net realizable value (NRV) is the estimated selling price in the ordinary course of business, less the estimated costs of completion and costs necessary to make the sale. NRV is based on the most reliable evidence available when the estimate is made. When NRV falls below cost or current carrying amount, inventory is written down to NRV and the loss is recognized immediately in profit or loss. IFRS Accounting Standards do not specify where to present such writedowns. In our view, writedowns of inventory to NRV and any reversals should be presented in cost of sales.

Companies disclose the amount of inventory recognized as an expense (which includes costs previously included in the measurement of inventory that has now been sold, etc.) the amount of writedowns during the period, and any reversals of writedowns.

While IAS 2 and Topic 330 share similar objectives, several measurement and cost component differences can affect comparability. Below we summarize what we view as the top 10 differences. For a deep dive in accounting for inventory under US GAAP, see KPMG Handbook, Inventory.

1. IAS 2 prohibits LIFO; US GAAP allows its use

Unlike US GAAP, IAS 2 prohibits LIFO because the International Accounting Standards Board (IASB) determined that it does not faithfully represent inventory flow patterns.

US GAAP Comparison

Under US GAAP, companies may use any of the three cost formulas noted above. Although most companies apply FIFO or weighted-average cost, some use LIFO for tax reasons. Companies applying LIFO often provide supplemental disclosures using another cost formula, which may assist investors with comparability to a company applying IFRS Accounting Standards.

2. IAS 2 generally measures inventories at the lower of cost and NRV; US GAAP does not

Unlike US GAAP, under IAS 2, inventories are generally measured at the lower of cost and NRV³, regardless of the costing technique or cost formula used.

US GAAP Comparison

Like IAS 2, US GAAP requires companies using FIFO or weighted-average cost to measure inventories at the lower of cost and NRV. Unlike IAS 2, companies applying LIFO or the retail method compare cost to market value instead of NRV.

Market value equals current replacement cost, subject to:

a ceiling of NRV; and
a floor of NRV less a normal profit margin.

Depending on circumstances, market value may differ from NRV.

3. Retail method cost is reviewed regularly under IAS 2; not under US GAAP

Unlike US GAAP, IAS 2 requires companies using the retail method to review the calculation regularly – in our view, at least at each reporting date – to ensure it approximates cost. The percentage of gross profit margin is revised, as necessary, to reflect markdowns of the selling price of inventory.

US GAAP Comparison

In our experience, unlike IAS 2, under the retail method US GAAP requires markdowns to be recognized as a direct and permanent reduction of the carrying amount of inventory. In practice, there is no requirement to periodically adjust the retail method back to a cost-based measure as IAS 2 requires.

4. Scope of onerous contracts requirements is broader under IFRS Accounting Standards than US GAAP

IFRS Accounting Standards define an onerous contract as one in which unavoidable costs exceed the economic benefits expected. Unavoidable costs are the lower of the costs of fulfilling the contract and any compensation or penalties from the failure to fulfill it. If a contract can be terminated without incurring a penalty, it is not onerous.

If a company has a non-cancellable contract to sell inventory below cost, then that contract can be onerous even before the inventory is acquired or produced, and a provision may be necessary in addition to any writedown to the NRV of existing inventory.

Read KPMG IFRS Perspectives article, Do you have an onerous contract?, to understand the requirements with respect to onerous contracts.

US GAAP Comparison

Unlike IFRS Accounting Standards, US GAAP generally does not permit recognizing provisions for onerous contracts unless required by specific guidance. However, a loss on a firm purchase commitment is recognized, like IFRS Accounting Standards. The loss is measured in the same manner as inventory writedowns under US GAAP – i.e. writedown to NRV or market value (see Item 2 above).

5. Decommissioning and restoration costs form part of inventory cost under IAS 2; not under US GAAP

A company may have a decommissioning or restoration obligation related to dismantling and removing an asset and restoring a site to its original condition. Under IAS 2, decommissioning and restoration costs incurred as a consequence of producing inventory are included in the cost of that inventory and recognized in profit or loss when the related inventory is sold.

US GAAP Comparison

Unlike IAS 2, under US GAAP, asset retirement obligation costs incurred as a consequence of producing inventory are not included in inventory cost. Instead, they increase the carrying amount of the related property, plant and equipment (PP&E). The capitalized amount is depreciated over the asset’s remaining useful life, and the resulting depreciation is included in production overheads in future periods.

6. Certain items of PP&E are reclassified as inventory under IAS 2; not under US GAAP

Under IAS 2, items of PP&E held for rental to others and then routinely sold in the ordinary course of business are reclassified to inventory once they cease being rented and become held for sale.

US GAAP Comparison

Unlike IAS 2, US GAAP does not provide specific guidance on assets that are rented to others and then routinely sold. As a result, practice differs. Proceeds from the sale are accounted for based on the nature of the asset sold, which may differ from the treatment under IFRS Accounting Standards.

7. Reversal of writedowns required under IAS 2; prohibited under US GAAP

When NRV increases, IAS 2 requires previously recognized writedowns to be reversed, up to original cost.

US GAAP Comparison

Unlike IAS 2, under US GAAP, writedowns of inventory to NRV (or market) are not reversed when values recover, except for changes arising from fluctuations in foreign exchange rates.

8. IAS 2 requires a consistent cost formula for similar inventory; US GAAP does not

IAS 2 requires companies to apply the same cost formula to inventory items similar in nature and use – regardless of which entity in a corporate group holds the items or the geographical region where they are located. In practice, this requirement often means an acquired business will need to rapidly realign to its new parent’s group methodologies and systems.

US GAAP Comparison

Unlike IAS 2, US GAAP allows companies to apply different cost formulas to inventories even when the items are similar in nature and use. As a result, group companies may choose different cost formulas based on their individual circumstances.

9. IAS 2 accounting for storage, shipping and handling costs may differ from US GAAP

IAS 2 generally requires storage costs to be expensed as incurred unless necessary before a further production stage, part of a discrete project, or required for maturation (e.g. wine).

Under IAS 2, shipping and handling costs necessary to bring the inventory to its present location and condition are included in inventory cost – e.g. transport from warehouse to point of sale. The accounting for shipping and handling costs incurred to distribute goods to customers is governed by IFRS 15 and depends on whether these activities represent a separate performance obligation from the sale of the goods.

US GAAP Comparison

US GAAP does not contain explicit guidance on accounting for storage costs, which may lead to differences in practice with IAS 2. Like IAS 2, shipping and handling costs necessary to bring purchased inventory to its present location or condition are included in the cost of inventory.

Unlike IFRS Accounting Standards, shipping and handling activities performed after the customer obtains control of the goods are subject to a policy election. For more detail see KPMG article, Revenue: Top 10 differences between IFRS 15 and ASC 606.

10. Intangible assets produced for resale may be inventory under IAS 2; not under US GAAP

Under IAS 2, inventory may include intangible assets produced for resale – e.g. software.

US GAAP Comparison

Unlike IAS 2, US GAAP does not allow inventory to include intangible assets. Differences may arise in practice – e.g. software inventory under US GAAP includes only the costs of duplicating, documenting and producing materials from the product masters and for physically packaging them for sale.

Inventory is a material asset for many industries, making its accounting and valuation a key focus area. Differences in cost components and measurement between IFRS Accounting Standards and US GAAP can create challenges for companies transitioning between the frameworks or aligning acquired businesses to group policies. These challenges often arise because changing inventory costing methodologies usually requires changes to systems and processes. In addition, GAAP differences can impact cost of sales and performance measures such as gross margin. Dual preparers should carefully assess each difference to develop a costing model that is efficient to maintain, reflects inventory values appropriately and complies with both frameworks.

Footnotes

¹ IAS 2, Inventories

² Topic 330, Inventory

³ The lower of cost and NRV measurement guidance in IAS 2 does not apply to (1) certain inventories held by producers of agricultural and forest products and mineral ores, and (2) certain inventories of commodity broker-dealers.

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Valerie Boissou

Partner, Audit, DPP - Accounting, KPMG US

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Paulina Kumah

Director, Advisory - Accounting Advisory Services, KPMG US

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Valerie Boissou

Partner, Audit, DPP - Accounting, KPMG US

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Paulina Kumah

Director, Advisory - Accounting Advisory Services, KPMG US

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Relevant Results

What are the requirements of IAS 2?

What are cost formulas?

What are costing techniques?

How does IAS 2 differ from US GAAP?

1. IAS 2 prohibits LIFO; US GAAP allows its use

2. IAS 2 generally measures inventories at the lower of cost and NRV; US GAAP does not

3. Retail method cost is reviewed regularly under IAS 2; not under US GAAP

4. Scope of onerous contracts requirements is broader under IFRS Accounting Standards than US GAAP

5. Decommissioning and restoration costs form part of inventory cost under IAS 2; not under US GAAP

6. Certain items of PP&E are reclassified as inventory under IAS 2; not under US GAAP

7. Reversal of writedowns required under IAS 2; prohibited under US GAAP

8. IAS 2 requires a consistent cost formula for similar inventory; US GAAP does not

9. IAS 2 accounting for storage, shipping and handling costs may differ from US GAAP

10. Intangible assets produced for resale may be inventory under IAS 2; not under US GAAP

The takeaway

Footnotes

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