Explanation

Under IFRS (International Financial Reporting Standards), when inventory has been written down to its net realizable value in a prior period, and the circumstances that caused the write-down no longer exist, the write-down can be reversed. However, this reversal is limited to the amount of the original write-down.

Key Points:

1. IFRS Treatment: IAS 2 (Inventories) allows reversal of inventory write-downs when there is clear evidence that the net realizable value has increased.
2. Limitation: The reversal cannot exceed the original write-down amount. The inventory cannot be carried at more than its original cost.
3. Accounting Treatment: The reversal is recognized as a reduction in cost of sales in the period in which the reversal occurs.
4. US GAAP Difference: Under US GAAP, reversal of inventory write-downs is prohibited. Once inventory is written down, it cannot be written back up even if market conditions improve.

Why Option C is Correct:

• The question specifically asks about the reversal of an inventory write-down, and option C correctly states that it is "limited to the amount of the original write-down."
• Option A ("prohibited") would be correct under US GAAP but not under IFRS.
• Option B ("recognized as an increase in cost of sales") is incorrect because the reversal actually reduces cost of sales, not increases it.

Accounting Entry for Reversal:

Debit: Inventory (to increase inventory value)
Credit: Cost of Sales (to reduce expense)

Debit: Inventory (to increase inventory value)
Credit: Cost of Sales (to reduce expense)

This treatment ensures that inventory is not overstated and that the reversal only restores the inventory to its original cost basis.