1301 Inventory Impairment and Valuation

Accounting and Finance Policy
TITLE: NO.: PAGE NO.

Inventory Impairment and Valuation 1301 1
Approved By: James Harbilas & Nathan
Reeve Signature:
EFFECTIVE DATE: June 30, 2013 REVISED DATE: June 20, 2013
Purpose and Scope
The purpose of this policy is to provide guidance to Business Units on the appropriate
accounting for and review of inventory impairment and valuation.
Application
This policy applies to all Business Units that carry inventory on the balance sheet.
Controllers are accountable for compliance with this policy. Business Units are
responsible for working with the Controllers to ensure this policy is consistently applied.
Any exception to this policy requires prior approval in writing from the Corporate
Controller.
Definitions
“Inventories” are assets:

• Held for sale in the ordinary course of business;
• In the process of production for such sale; or
• In the form of materials or supplies to be consumed in the production process or
the rendering of services
“Net realizable value (NRV)” equals the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs necessary to
make the sale.
“Fair Value” is the amount of the consideration that would be agreed upon in an arm’s
length transaction between knowledgeable, willing parties who are under no compulsion
to act.
“Cost” of inventory includes all costs of purchase (including taxes, transport and
handling), costs of conversion and other costs incurred in bringing inventory to their
present condition and location. This includes the application of both variable and fixed
overhead.
Costs of conversion of inventories include costs directly related to the units of production
(e.g. direct labour), and a systematic allocation of fixed and variable production
overheads that are incurred in converting materials into finished goods (refer to
Appendix 1 for a detailed list).
Costs of inventories should not include abnormal waste, storage costs, administrative
overheads unrelated to production, or selling costs. Other excluded costs are foreign
exchange differences arising directly on the recent acquisition of inventories invoiced in
a foreign currency and interest costs when inventories are purchased with deferred
settlement terms.
Reeve Signature:
Under IFRS, the same costing formula must be used for all inventories having the same
nature and use to the entity. Therefore:
• Business units who engage in Manufacturing activity will use Cost on a First-In-
First-Out (FIFO) basis for serialized items of inventory and the Weighted
Average Cost (moving unit average cost) for non-serialized items
• Business units who engage in Service activity will use Weighted Average Cost,
except for serialized inventory, such as engines, for which they will use Cost on
a FIFO basis.
Exceptions to the above cost formulas will not be permitted.
Valuation
Inventory shall be measured at the lower of cost and NRV.
Impairment:
To ensure inventory is valued at NRV, inventory shall be reviewed, at a minimum on a

quarterly basis. Inventory is impaired when its cost exceeds its net realizable value, and
the assessment of inventory impairment is done on an item-by-item basis.
Amounts recorded to reduce inventory to NRV should be recorded in a contra account

and reported as a reserve. The actual cost of inventory should not be adjusted.
NRV is assessed at the end of each reporting period. When circumstances that caused
a previous impairment of inventory no longer exist, or when there is clear evidence of an
increase in NRV, the amount of impairment write-down must be reversed. This reversal
is limited to the original amount of impairment.
Similar or related items of inventories, such as items with similar purposes or end uses
which cannot be practically evaluated separately from other items in that product line,
should be grouped together.
Estimates of the NRV are based on the most reliable evidence available at the time the
estimates are made, of the amount of inventories are expected to realize. These
estimates take into consideration fluctuations of price or cost directly related to events
occurring after the end of the period to the extent that such events confirm conditions at
the end of the period.
Materials and other supplies held for use in the production of inventories are not written
down below costs if the finished products are expected to be sold at or above cost.
However, when a decline in the price of materials indicates that the cost of the finished
products exceeds NRV, the materials are written down to NRV.
Reeve Signature:
In order to streamline the process for determining NRV of inventory, a formulaic

approach will be taken. Each formula will be reviewed periodically, or as circumstances
change. Refer to Appendix 2 for reserve formulas. Additional reserves should be
recorded if specific issues are known with respect to inventory items, such as known
obsolescence, exchange rate fluctuations, supplier price decreases, etc.
Information to be maintained:
Business units will obtain/maintain the following records, and provide to corporate:
• Carrying amount of inventory by class (raw materials, WIP, finished goods);

• Supporting calculations for the application of variable and fixed production
overhead;
• Amount of inventories recognized as an expense in the period (i.e. carrying
amount of inventories sold);
• Amount of any impairment write-down, or reversal of impairment write-down and
a description of the circumstances or events that led to any reversal of
impairment;
• Carrying amount of any inventories pledged as security; and
• Aged inventory records for prior and current month.
ATTACHMENTS
The following attachments form an integral part of this policy.

Appendix 1 – Examples of Costs to be included in Overhead
Appendix 2 – Inventory Reserve Formulas by Business Unit
Reeve Signature:
Appendix 1 – Examples of Costs to be included in Overhead
The following provides a general guideline as to the types of costs that would be
included in overhead.
• Compensation costs of supervisory personnel (salary, wages and benefits)
The following costs should be pro-rated between cost of sales and selling, general and
administrative costs, based on a rational and consistent basis (square footage of
buildings for example):
• Light, heat and other utilities
• Building and equipment maintenance
• Property tax
• Insurance
• Depreciation/amortization of buildings
The following would be expenses that would be considered selling, general and
administrative in nature:
• Professional fees such as legal, audit and other consulting
• Compensation costs (salary, wages and benefits) related to administrative,
finance, sales and marketing personnel
• Advertising and other marketing related costs
• Charitable donations
• Information technology costs
Reeve Signature:
Appendix 2 – Inventory Reserve Formulas by Business Unit
Stock units are written down over the period that reflects the
Stock Units
decline in market value of units as they age due to factors such
as changes in market demand and technology changes.
Specifically:
• 7% reserve for items over 1 year old

• 14% reserve for items over 2 years old
• 40-50% reserve for items over 4 years old
All units that are 5 years old or older should be assessed using
market data to ensure that carrying value reflects NRV.
Any additional identified specific reserves should be recorded

separately and not included in the reserve formulas above.
At least annually, a specific assessment of NRV is performed to

determine if an additional reserve is required. NRV is
determined by reference to a price in a recent sale of similar
items of inventory or through external pricing sources.
Additionally, overhead applied to a stock unit is fully reserved in

year of manufacture.
Serialized inventory is written down over the period that reflects

Serialized Inventory
the decline in market value of units as they age due to factors
such as changes in market demand and technology changes.
Specifically:
• 7% reserve for items over 1 year old

• 40-50% reserve for items over 4 years old
All units that are 5 years old or older should be assessed using
market data to ensure that carrying value reflects NRV.
Any additional identified specific reserves should be recorded

separately and not included in the reserve formulas above.
At least annually, a specific assessment of NRV is performed to

determine if an additional reserve is required. NRV is
determined by reference to a price in a recent sale of similar
items of inventory or through external pricing sources.
Reeve Signature:
Exchange inventory includes exchange engines and screw

Whole Goods
compressors, new engines are categorized as ‘serialized
Exchange Inventory
inventory’.
(Gas Drive)
A specific reserve is applied based on the historical movements
by each model. The reserve is determined by the operations
department.
Exchange parts consist of all exchange components in the EXC

Exchange
(Canada) and EXU (for U.S.) Series, less engines (EXC90000)
Accessories
and screw compressors (EXC18000).
(Gas Drive)
A 15% reserve is applied for all items as soon as they move
into inventory. At least annually, a specific assessment of NRV
is performed to determine if an additional reserve is required.
Reserves are based on movement of parts, which reflects

Direct materials and
expected market value of items as they age.
replacement parts
• 25% reserve for items with no turns in one to two years
• 50% reserve for items with no turns in two to three years
• 75% reserve for items with no turns in three to four years
• 100% reserve for items with no turns in more than four
years
Reserves can be reduced for the value of parts that may be

returned to the supplier for credit.

1301 Inventory Impairment and Valuation

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

1301 Inventory Impairment and Valuation

Uploaded by

Copyright:

Available Formats

Accounting and Finance Policy

TITLE: NO.: PAGE NO.

Purpose and Scope

“Inventories” are assets:

Exceptions to the above cost formulas will not be permitted.

Inventory shall be measured at the lower of cost and NRV.

To ensure inventory is valued at NRV, inventory shall be reviewed, at a minimum on a

Amounts recorded to reduce inventory to NRV should be recorded in a contra account

In order to streamline the process for determining NRV of inventory, a formulaic

• Carrying amount of inventory by class (raw materials, WIP, finished goods);

The following attachments form an integral part of this policy.

Appendix 1 – Examples of Costs to be included in Overhead

Appendix 2 – Inventory Reserve Formulas by Business Unit

• 7% reserve for items over 1 year old

Any additional identified specific reserves should be recorded

At least annually, a specific assessment of NRV is performed to

Additionally, overhead applied to a stock unit is fully reserved in

Serialized inventory is written down over the period that reflects

• 7% reserve for items over 1 year old

Any additional identified specific reserves should be recorded

At least annually, a specific assessment of NRV is performed to

Exchange inventory includes exchange engines and screw

Exchange parts consist of all exchange components in the EXC

Reserves are based on movement of parts, which reflects

Reserves can be reduced for the value of parts that may be

You might also like