LCNRV 12

Monday, July 6, 2020 3:09 PM

PAS 2, Paragraph 9, inventories shall be measured at LCNRV

NRV
Estimated selling price - Estimated cost to complete and to sell

Cost of inventories is not recoverable:

a. Damaged
b. Wholly or partially obsolete
c. Selling price have declined
d. Estimated cost of completion and disposal have increased
• Assets shall not be carried in excess of amounts expected to be realized from their sale or use

Determination of NRV
Inventories are written down on item by item or individual basis
Maybe appropriate based on classification if:
• Same product line
• Same purpose
• Produced and marketed in same geographical area
• Cannot be evaluated separately
Materials held for production is not written down if finished products are expected to be sold above
cost
If cost exceeds NRV, materials are written down to NRV
Replacement cost - best evidence of NRV

If cost is lower than NRV - not recognized

If cost is higher Than NRV - recognized

Accounting for inventory writedown

• COGS is the same for both method
A. Direct /COGS Method
Inventory recorded - LCNRV
Loss and gain - not accounted separately

Entry:
Inventory xx
Income Summary xx
B. Allowance/Loss Method
Inventory recorded - cost
Loss and gain - accounted separately
Preferred - writedown can be identified
Entry:
Inventory xx
Income Summary xx
Loss on inventory writedown xx
Allow. for Invty. Writedown xx
• Loss is included in COGS

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 • Loss is included in COGS
• Allowance deducted from inventory
Gain:
Allow. for inventory writedown xx
Gain on invty. Writedown xx
• Limited to allowance balance
• Gain is deduction from COGS

Purchase commitment
Obligations to acquire goods in the future at fixed price and quantity
Noncancelable commitments
Decline in purchase price - loss - period of decline
Entry for loss:
Loss on pur. commitment (other exp) xx
Est. loss on Pur. commitment (current liability) xx

Entry on actual purchase:

Purchases LCNRV
Loss on PC add.loss
Est. Liab on PC prev. est.
Accts Payable Contract price

Increase in market price - gain - limited to loss

Entry:
Purchases LCNRV
Est. Liab on PC prev. est.
Accts Payable Contract price
Gain on PC (other income) gain

Disclosures
With respect to inventories

a. Accounting policies in measuring inventories incl. cost formula - FIFO, WA, MA

b. Total carrying amt on inventories and classifications - merch, production supplies, goods in
process, finished goods
c. Carrying amount of inventories at fair value less cost of disposal - LCNRV
d. Amount of inventories recognized as expense - COGS
e. Amt. of writedown - expense during the period
f. Amt. of reversal of writedown
g. Circumstance that led to reversal
h. Carrying amt. of inventories pledged as security liabilities - collateral

Agricultural, forest and mineral products

Pas 2, paragraph 4 measured at NRV at certain stages of production

1. When sale is assured under forward contract or gov. guarantee

2. Homogenous market exists and there is negligible risk of failure to sell

Commodities of Broker-traders

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Commodities of Broker-traders
Pas 2, paragraph 3, commodities of broker traders are measured at Fair value less cost of disposal
PFRS 13, paragraph 9, fair value - price that would be received sell asset in an orderly transaction
between market participants
Broker Traders - those who buy and sell commodities for others or on their own account
Generating profit from fluctuation in price or broker-traders' margin

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