Explanation

Under IFRS (International Financial Reporting Standards), when the circumstances that previously caused inventory to be written down below cost no longer exist, the reversal of the write-down is permitted. According to IAS 2 (Inventories), the reversal should be recognized as a reduction in cost of sales in the period in which the reversal occurs.

Key Points:

1. IFRS allows reversal of inventory write-downs when the net realizable value increases.
2. Recognition: The reversal is recognized as a reduction in cost of sales, which increases gross profit.
3. Limitation: The reversal cannot exceed the original write-down amount (cannot write inventory up above original cost).
4. US GAAP difference: Under US GAAP, reversal of inventory write-downs is prohibited.

Why Option B is correct:

• Under IFRS, the reversal reduces cost of sales, effectively increasing gross profit.
• This treatment reflects the economic reality that the inventory's value has recovered.

Why other options are incorrect:

• Option A: Incorrect because IFRS permits reversal (though US GAAP prohibits it).
• Option C: Incorrect because the reversal is not recognized as other operating income; it's recognized through cost of sales.

Accounting Entry:

Dr. Inventory (to increase inventory value)
Cr. Cost of Sales (to reduce expense)

Dr. Inventory (to increase inventory value)
Cr. Cost of Sales (to reduce expense)

This treatment ensures that the income statement reflects the recovery of inventory value in the period it occurs.