2 Overview of session 1. Scope of application and key concepts 2. Recognition and measurement3. Disclosures4. E.C. specific implications5. Questions
3 1. Scope of application and key concepts Inventories1. Scope of application and key concepts
4 Definition Inventories are assets: held for sale in the ordinary course of business; orin the process of production for such sale; orin the form of materials or supplies to be consumed in the production process or in the rendering of services
5 Inventories Inventories include: goods: commodities purchased and held for resalesupplies: raw materialsproducts: intermediate products, finished goodsRaw MaterialsWork in ProgressFinished Goods
6 Out of scope Not held for sale of for use in the production cycle: Office suppliesexpensedFixed assetsdurable use for own activitiesE.g. Most spare parts and servicing equipment are usually carried as inventory and recognised as an expense as consumed. However, major spare parts and stand-by equipment qualify as property, plant and equipment when the enterprise expects to use them during more than one period or if they can be used only in connection with an item of property, plant and equipment and their use is expected to be irregular.
7 IPSAS 12 Covers all inventories other than: WIP under construction contractsFinancial instrumentsAgricultural and forest products, mineral ores and biological assets
8 2. Recognition and measurement Inventories2. Recognition and measurement
9 Inventories – Initial recognition Initial recognition shall normally take place at the date of acquisition or date of entry shall correspond to the date on which the ownership of the inventories is transferred to the E.C., which generally corresponds to when delivery of the goods is accepted.For simplification purposes this may during the year be when the invoice is receivedCut-off and reporting at year-end:If booking based on invoice, regularise any discrepancies between invoicing and delivery/transfer of ownershipInvestigate specific contractual provisions determining title (e.g. FOB terms: shipping or destination)Consignment inventories (held by custodians)
10 Costs to be included Cost of Other Purchase Costs Conversion All costs contributing to bring inventories to their present location and conditionCost ofPurchaseOtherCostsConversionincludes:rebatestax (customs/VAT)transporthandling costs attributable to the acquisitionAny other costs that are incurred in bringing the inventories to their present location and conditionFixed & variable production overheadsDirect costs, e.g. direct labour
11 Costs to be excludedAbnormal amounts of wasted materials, labour or other production costsStorage costsUnless those costs are necessary in the production process prior to a further production stageAdministrative overheads that do not contribute to bringing inventories to their present location and conditionSelling costs
12 Cost Formulas Specific identification: Global methods for items that are not ordinarily interchangeable and goods or services produced and segregated for specific projectsGlobal methodsFirst in First Out (FIFO) formula: assumes that the items of inventory that were purchased or produced first are sold firstWeighted Average Cost (WAC) formula: the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the periodConsistency required across each type of inventoryFIFO better reflects changes in prices.
13 Worked example – Inventory costing Inventory: + during year NInventory: - during year nDateQ and (P)CostQAmountBeginning inventory100 units (320)32,000March 1250 units (341)85,250April 1(230)?July 1200 units (343)68,600September 1(120)October 1100 units (346)34,600November 1(100)December 150 units (347)17,350Total in600 units205,800Total700 units237,800(450)Closing inventory:250 units
14 Inventory costing - FIFO Inventory: + during year NInventory: - during year nDateQ and (P)CostQAmountBeginning inventory100 units (320)32,000March 1250 units (341)85,250April 1(230)100*(320)+130*(341)July 1200 units (343)68,600September 1(120)120*(341)October 1100 units (346)34,600November 1(100)100*(343)December 150 units (347)17,350Total in600 units205,800Total700 units237,800(450)151,550Closing inventory:250 units = 86,250
16 What are the Dr and Cr involved in a purchase of inventory? The debits and creditsInventory is a current assetInventory is expensed… …when the related revenue is recognisedWhat are the Dr and Cr involved in a purchase of inventory?
17 Two methods of accounting Stock ledgers – each movement in or out is accounted for individually; the level of inventories is known at each precise moment in timePeriodic stock counts – inventories get adjusted based on periodic counts of physical inventory
18 Stock ledgers Using the FIFO method # ins # Using the FIFO method# ins #Dt : 6# Purchases of goods (economic outturn account) :Ct : 4# SuppliersDt : 3# Inventories (balance sheet)Ct : 6# Movement in inventories (economic outturn account)# payment of suppliers #Dt : 4 SuppliersCt : 5# Cash# outs #Dt : 6# Movement in inventories (economic outturn account)Ct : 3# Inventories (balance sheet)
19 Periodic stock counts Throughout the year : # ins # Dt : 6# Purchase of goods (economic outturn account) :Ct : 4# Suppliers# payment of suppliers #Dt : 4# SuppliersCt : 5# CashAt year end :# reversal of beginning balance #Dt : 6# Movement in inventories (economic outturn account)Ct : 3# Inventories (balance sheet)# recording of final balance #Dt : 3# Inventories (balance sheet)Ct : 6# Movement in inventories (economic outturn account)
20 Inventories – Subsequent measurement Measure inventories at lower of:Cost and Net Realisable ValueCost may not be recoverable when:damagedobsoleteincreased costs of completionselling price is reduced
21 Net Realisable ValueNet Realisable Value The estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the saleSelling price XTrade discounts (X)Costs to completion (X)Marketing, selling and distribution costs (X)Net realisable value XUse replacement cost when the economic benefitsOr service potential cannot be acquired in the market
23 Key disclosures Accounting policies (including cost formula used) Balance sheetCarrying amount of inventories (on face of BS)Analyse inventories by classification (e.g. raw materials, finished goods etc…)Economic outturn accountCost of inventories expensed in periodOther
24 4. E.C. specific implications Inventories4. E.C. specific implications
25 Current accounting V. IPSAS Compliance issueCurrent accounting policyRevised accounting policyNature and definition of inventory itemsHeld for sale or for internal useDifferentiate between inventories, fixed assets and expensesOffice suppliesOther consumablesMaterial for building maintenanceScientific materialPublicationsInventoriesExpensesEAGGF inventoriesDo not belong to the E.C.Pricing at year endLatest purchase price, except:Publications (1/3 of sales price)Fissile matters (cost of acquisition)FIFONRV:Goods for saleGoods to be distributed for freeLower of cost or marketLower of cost or NRVLower of cost or replacement cost