Inventories

http://www.cc.cec/budg/

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Overview of session

1. Scope of application and key concepts

3. Disclosures

5. Questions

4. E.C. specific implications

2. Recognition and measurement

Inventories

1. Scope of application and key concepts

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Definition

Inventories are assets:

• held for sale in the ordinary course of business; or

• in the process of production for such sale; or

• in the form of materials or supplies to be consumed in the production process or in the rendering of services

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Inventories

Inventories include:• goods: commodities purchased and held for resale

• supplies: raw materials

• products: intermediate products, finished goods

Raw Materials Work in Progress Finished Goods

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Out of scope

Not held for sale of for use in the production cycle:

• Office supplies – expensed

• Fixed assets– durable use for own activities

• E.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.

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IPSAS 12

Covers all inventories other than:

• WIP under construction contracts

• Financial instruments

• Agricultural and forest products, mineral ores and biological assets

Inventories

2. Recognition and measurement

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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 received

• Cut-off and reporting at year-end:

– If booking based on invoice, regularise any discrepancies between invoicing and

delivery/transfer of ownership

– Investigate specific contractual provisions determining title (e.g. FOB terms:

shipping or destination)

– Consignment inventories (held by custodians)

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Costs to be included

Cost of Purchase

OtherCosts

Cost of Conversion

includes:

- rebates

- tax (customs/VAT)

- transport

- handling costs attributable to the acquisition

Direct costs, e.g.

direct labour

Fixed & variable production overheads

Any other costs that are incurred in

bringing the inventories to their

present location and condition

All costs contributing to bring inventories to their present location and condition

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Costs to be excluded

• Abnormal amounts of wasted materials, labour or other production costs

• Storage costs

– Unless those costs are necessary in the production process prior

to a further production stage

• Administrative overheads that do not contribute to bringing inventories to their present location and condition

• Selling costs

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Cost Formulas

• Specific identification:

– for items that are not ordinarily interchangeable and goods or services

produced and segregated for specific projects

• Global methods

– First in First Out (FIFO) formula: assumes that the items of inventory

that were purchased or produced first are sold first

– Weighted 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 period

• Consistency required across each type of inventory

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Worked example – Inventory costing

Inventory: + during year N Inventory: - during year n

Date Q and (P) Cost Date Q Amount

Beginning

inventory

100 units (320) 32,000

March 1 250 units (341) 85,250 April 1 (230) ?

July 1 200 units (343) 68,600 September 1 (120) ?

October 1 100 units (346) 34,600 November 1 (100) ?

December 1 50 units (347) 17,350

Total in 600 units 205,800

Total 700 units 237,800 (450) ?

Closing inventory: 250 units

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Inventory costing - FIFO

Inventory: + during year N Inventory: - during year n

Date Q and (P) Cost Date Q Amount

Beginning

inventory

100 units (320) 32,000

March 1 250 units (341) 85,250 April 1 (230) 100*(320)+130

*(341)

July 1 200 units (343) 68,600 September 1 (120) 120*(341)

October 1 100 units (346) 34,600 November 1 (100) 100*(343)

December 1 50 units (347) 17,350

Total in 600 units 205,800

Total 700 units 237,800 (450) 151,550

Closing inventory: 250 units = 86,250

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Inventory costing - WAC

Date Movements Inventories

Q Cost/unit Value Q Cost/unit Value

January 1 100 320 32,000 100 320 32,000

March 1 250 341 85,250 350 335 = 117,250/350 117,250

April 1 (230) 335 (77,050) 120 335 40,200

July 1 200 343 68,600 320 340 = 108,800/320 108,800

September 1 (120) 340 (40,800) 200 340 68,000

October 1 100 346 34,600 300 342 = 102,600/300 102,600

November 1 (100) 342 (34,200) 200 342 68,400

December 1 50 347 17,350 250 343 = 85,750/250 85,750

Total out: 450 units 152,050 Closing inventory: 85,750

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The debits and credits

• Inventory is a current asset

• Inventory is expensed……when the related revenue is recognised

What are the Dr and Cr involved in a purchase of inventory?

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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 time

• Periodic stock counts – inventories get adjusted based on periodic counts of physical inventory

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Stock ledgers

 Using the FIFO method # ins #Dt : 6# Purchases of goods (economic outturn account) : 205 800

Ct : 4# Suppliers 205 800 Dt : 3# Inventories (balance sheet) 205 800

Ct : 6# Movement in inventories (economic outturn account) 205 800 # payment of suppliers #Dt : 4 Suppliers 205 800

Ct : 5# Cash 205 800 # outs #Dt : 6# Movement in inventories (economic outturn account) 151 550

Ct : 3# Inventories (balance sheet) 151 550

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Periodic stock counts

Throughout the year :

# ins #Dt : 6# Purchase of goods (economic outturn account) : 205 800

Ct : 4# Suppliers 205 800 # payment of suppliers #Dt : 4# Suppliers 205 800

Ct : 5# Cash 205 800 At year end :

# reversal of beginning balance #Dt : 6# Movement in inventories (economic outturn account) 32 000

Ct : 3# Inventories (balance sheet) 32 000 # recording of final balance #Dt : 3# Inventories (balance sheet) 86 250

Ct : 6# Movement in inventories (economic outturn account) 86 250

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Inventories – Subsequent measurement

• Cost may not be recoverable when:– damaged

– obsolete

– increased costs of completion

– selling price is reduced

Measure inventories at lower of:

Cost and Net Realisable Value

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Net Realisable Value

Selling price X

Trade discounts (X)

Costs to completion (X)

Marketing, selling and distribution costs (X)

Net realisable value X

Net 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 sale

Use replacement cost when the economic benefitsOr service potential cannot be acquired in the market

Inventories

3. Disclosures

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Key disclosures

• Accounting policies (including cost formula used)

• Balance sheet

– Carrying amount of inventories (on face of BS)

– Analyse inventories by classification (e.g. raw materials, finished

goods etc…)

• Economic outturn account

– Cost of inventories expensed in period

• Other

Inventories

4. E.C. specific implications

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Current accounting V. IPSASCompliance issue Current accounting policy Revised accounting policy

Nature and definition of inventory items Held for sale or for internal use Differentiate between inventories, fixed

assets and expenses

Office supplies

Other consumables

Material for building maintenance

Scientific material

Publications

Inventories Expenses

Expenses

Inventories

Inventories

Inventories

EAGGF inventories Do not belong to the E.C.

Pricing at year end Latest purchase price, except:

Publications (1/3 of sales price)

Fissile matters (cost of acquisition)

FIFO

NRV:

Goods for sale

Goods to be distributed for free

Lower of cost or market Lower of cost or NRV

Lower of cost or replacement cost

Inventories

5. Questions

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