Was the Inventory Write-Down Recorded in an Appropriate Time Period.

1. Was the inventory write-down recorded in an appropriate time period, or should Reliance have either advanced or postponed the recognition of the inventory write-down?

Yes, it was recorded in the appropriate time because inventory write-down should be recorded in the period in which it took place. It could not be an estimated/ projected amount. Since the market price decline happened in the last quarter of 2014, it was correct to write down the inventory value in year end.

1. If you were an analyst, would you write down the inventory value when you evaluate Reliance?

1. Was Reliance’s application of the LCM principle by major product categories consistent with GAAP?

According to US GAAP, there are three categories for LCM – product category, item-by-item and total inventory. Whereas for IFRS, there are only two categories – product category and item-by-item.

1. Was Reliance’s method of determining the amount of write-down consistent with GAAP?

If the market value is a range, it is reasonable to choose the point with the largest probability/ likelihood. If there is no evidence showing that one point has a higher chance of occurrence than the other one, take the middle point which can eliminate the effect of extreme values/ outliers. It is because IFRS is moving from conservatism to fair value principle (neutral based on the market price). As for US GAAP, it emphasizes on recording the minimum loss within the range.

1. Give plausible reasons why Reliance’s management recorded the maximum amount of write-down in 2014.

Big bath accounting – make a bad year looks even worse and increase the chance of having a good earning next year. From Exhibit 2, even without inventory write-off, Reliance would report operating loss of $38.7. After tax benefit of $13.5, the total net loss would be $25.2m and $0.3 per share. Given analysts’ forecast $0.35 profit per share, 2014 is a hopeless year.

1. Was the disclosure of the inventory write-down in accordance with GAAP?

Reliance has disclosed the impact of the write-down by including the amount of the provision, factors influencing the determination of the write-down, and an analysis of the impact on gross margin. Management’s discussion and Analysis provides additional information on the determination of the inventory write-down.

1. Reliance has not disclosed the write-down separately in the income statement. Rather, it included the write-down with the COGS. Is this appropriate?

If the amount of the Loss on Write-Down of Inventory is relatively small, it can be reported as part of the cost of goods sold. If the amount of the Loss on Write-Down of Inventory is significant/ material/ unusual, it should be reported as a separate line on the income statement.

1. Were 2015 memory sales profitable?

Sale = 52.4

Gross margin = 19.8%

COGS = 42.02

1. What are the implications of the $18.6 million reversal of inventory allowance for a financial analyst analyzing gross margin ratio, inventory turnover, and operating cash flows in the 2015 first quarter financial statements?

The reversal has no impact on the operating cash flows.

The CEO wants to reverse the part of the write-down related to the memory inventory in stock at the end of the first quarter of 2015 by an additional $1.5 million. This reversal would signal to the market that 2014 was an isolated year in terms of financial performance. According to the CEO, increasing the net value would be consistent with the economic reality because the replacement cost of the memory products inventory—even by most conservative estimates—has gone up significantly since the write-down recorded at the end of 2014.