Inventories IPSAS 12

1. InventoriesIPSAS 12 By Judith Muhoro

2. Inventories 1. Scope of application and key concepts

3. 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

4. Inventories Raw Materials Work in Progress Finished Goods Inventories include: • goods: commodities purchased and held for resale • supplies: raw materials • products: intermediate products, finished goods

5. 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.

6. Overview of session 1. Scope of application and key concepts 2. Recognition and measurement 3. Disclosures 4. Questions

7. IPSAS 12 Covers all inventories other than: • WIP under construction contracts • Financial instruments • Agricultural and forest products, mineral ores and biological assets • Work-in-progress of services to be provided for no or nominal consideration directly in return from the recipients.

8. Inventories 2. Recognition and measurement

9. Inventories – Initial recognition • Initial recognitionshall 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 entity., whichgenerallycorresponds to whendelivery of the goodsis accepted. • For simplification purposes this may during the year 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)

10. Costs to be included Cost of Purchase Other Costs Cost of Conversion All costs contributing to bring inventories to their present location and condition • includes: • rebates • tax (customs/VAT) • transport • handling costs attributable to the acquisition Any other costs that are incurred in bringing the inventories to their present location and condition Fixed & variable production overheads Direct costs, e.g.direct labour

11. 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

12. 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

13. Worked example – Inventory costing

14. Inventory costing - FIFO

15. Inventory costing - WAC

16. 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?

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

18. Inventories – Subsequent measurement Measure inventories at lower of: Cost and Net Realisable Value • Cost may not be recoverable when: • damaged • obsolete • increased costs of completion • selling price is reduced

19. Net Realisable Value Net Realisable ValueThe estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale Selling price X Trade discounts (X) Costs to completion (X) Marketing, selling and distribution costs (X) Net realisable value X Use replacement cost when the economic benefits Or service potential cannot be acquired in the market

20. Inventories 3. Disclosures

21. 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

22. Inventories 5. Questions