Questions:
According to IFRS, how should a company record the value of its inventory for accounting purposes?

One of the companies in my portfolio manufactures pharmaceutical products. The company had an inventory of vaccines of $1,000,000. On June 1, 2024, it was now estimated that this inventory could be sold for $1,200,000 in the market and the cost of selling this inventory was $400,000. On June 30, 2024, the valuation of this inventory increased to $1,500,000 and the cost of selling remained unchanged. 

How will these changes relatively impact the company's EPS?

Reference answers:
According to the IFRS standard for accounting for inventories IAS 2, the inventory should be recorded at the lower of cost and net realisable value where the net realisable value is the selling price minus selling costs.

# Valuation on June 1, 2024

Inventory valuation (Carrying amount in the books) = $1000000
Net realisable value = Market value - selling costs  = $1200000 - $400000 = $800000

The inventory valuation was $1000000 whereas, the net realisable value was $800000 ($1200000 - $400000).

The net realisable value of the inventory is less than the carrying amount, so an impairment loss must have been recorded on June 1, 2024.

Impairment = Carrying amount - Net realisable value
Impairment = $1000000 - $800000 = $200000

This impairment will result in a decrease in the value of inventory in the balance sheet by $200000 and an accompanying entry will be recorded in the income statement by reducing the income by $200000. 

This decrease in the income will mean that your EPS went down on June 1, 2024, when this impairment in the value happened.

# Valuation on June 30, 2024

At the end of the year, the value of the inventory has increased by $1500000 which is higher than the current amount recorded in the books which is $800000.

Inventory valuation (Carrying amount in the books) = $800000
Net realisable value = Market value - selling costs  = $1500000 - $400000 = $1100000

The original cost of the inventory was $1000000 and now the net realisable value is $1100000. So the lower cost and net realisable value is now $1000000. 
Therefore, according to the IFRS, the inventory should be recorded at $10000000.

The current valuation in the books is $800000 and the revised valuation should be $1000000. This means that an increase in the valuation of $20000 should be recorded and a corresponding positive increase in the income.

The impact of this positive addition to the income statement is that your EPS will increase.

# Overall Impact

The change in the value of the inventory on June 1, 2024, had a negative impact on the EPS whereas, the change in the value on June 30, 2024, had a positive impact on EPS.