that results in an asset’s book value falling below its current market value during pe-
riods of moderate to high inflation. Countries whose accounting standards follow the
historical cost approach include Canada, Germany, Japan, and the United States.
The alternative is to allow upward or downward revaluation of fixed assets to the
most current fair (appraised) value. Downward revaluation may be used under this
approach even to value the asset below its cost similar to reporting a write down
under the historical cost method. Those who advocate upward revaluation contend
that the balance sheet should, whenever possible, present the fair value of the com-
pany’s assets, provided that the increase in value is not determined to be temporary.
Revaluation gives management more flexibility to improve the appearance of its bal-
ance sheet when it is most advantageous. Countries where the accounting rules allow
some form of revaluation include Brazil, France, Italy, the Netherlands, Switzerland,
and the United Kingdom. IAS 16, “Property, Plant and Equipment,” establishes his-
torical cost as the benchmark standard, but permits revaluations as an allowed alter-
native, albeit that the IASB is proposing to eliminate the allowed alternative when
IAS 16 is adopted as an IFRS.
(c) Inventory. Inventory valuation is an extremely important area of accounting.
For many commercial companies, inventory is one of the largest assets on the bal-
ance sheet. Inventory consists of goods owned and held for sale in the normal course
of business operations, and raw materials and goods in the process of being produced.
Inventory is normally recorded at acquired cost, which includes the purchase price
plus any additional costs needed to bring the product to a salable state. The critical
accounting question regarding inventory is how to allocate costs between the cost of
goods sold in the income statement and the goods yet to be sold (i.e., the inventory)
on the balance sheet. The three main acceptable methods most often used to account
for inventory are first in, first out (FIFO), the average cost method, and last in, first
out (LIFO), all of which are applied on a lower-of-cost-or-market-value basis.
The LIFO method allocates the cost on the premise that the last goods purchased are
the first ones sold. The ending inventory that remains on the balance sheet under this
approach represents the inventory that was purchased first. This is considered conser-
vative for income statement purposes, since the resulting cost of goods sold (expense)
is generally higher (assuming rising prices). However, the majority of accountants
around the world argue that LIFO has no conceptual basis in accounting theory in most
industries. The inventory on the balance sheet, they argue, is valued at “inaccurate” old
prices when LIFO is applied. The main advantage for a company using LIFO is that it
can provide large tax savings when used for tax purposes. This is because, under con-
ditions of rising prices, taxable income will be lower under the LIFO method than
under the FIFO method. In addition, LIFO allows for a more current cost to flow
through the income statement. As can be seen from Exhibit 12.2, all countries listed
allow the LIFO method to be used under certain circumstances. However, countries’
standards differ on the circumstances under which it can be used, and from a worldwide
perspective it is rarely used in practice, other than by companies in the United States.
In certain countries, such as Germany, LIFO can be used for tax purposes if there
is a corresponding physical flow of goods, which would be unusual, and conse-
quently LIFO is not widely used. In Brazil and the United Kingdom, LIFO is not
often used for book purposes, since it is not allowed to be used for tax purposes. IAS
permits LIFO as an allowed alternative but a proposed amendment has been an-
nounced to eliminate the use of LIFO.
12 • 14 SUMMARY OF ACCOUNTING PRINCIPLE DIFFERENCES