PwC

Inventories

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Overview of session

1. Scope of application and key concepts

2. Recognition and measurement

3. Disclosures

4. E.C. specific implications

5. Questions

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Inventories

1. Scope of application and

key concepts
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
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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

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Inventories

2. Recognition and
measurement
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

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

includes:
- rebates Any other costs that
are incurred in
- tax (customs/VAT) bringing the
- transport Cost of Other inventories to their
present location and
- handling costs condition
attributable to the
acquisition
Purchase Costs

Cost of
Conversion
Fixed & variable
Direct costs,
production overheads
e.g.
direct labour

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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 100 units (320) 32,000

inventory

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 100 units (320) 32,000

inventory

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

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

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Net Realisable Value

Net Realisable Value Selling price X

Trade discounts (X)
The estimated selling price in
the ordinary course of Costs to completion (X)
business less the estimated Marketing, selling and
costs of completion and
distribution costs (X)
estimated costs necessary to
make the sale Net realisable value X

Use replacement cost when the economic benefits

Or service potential cannot be acquired in the market

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Inventories

3. Disclosures
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

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Inventories

4. E.C. specific implications

Current accounting V.
IPSAS
Compliance 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 Inventories Expenses

Other consumables Expenses

Material for building maintenance Inventories

Scientific material Inventories

Publications Inventories

EAGGF inventories Do not belong to the E.C.

Pricing at year end Latest purchase price, except: FIFO

Publications (1/3 of sales price)

Fissile matters (cost of acquisition)

NRV:

Goods for sale Lower of cost or market Lower of cost or NRV

Goods to be distributed for free Lower of cost or replacement cost

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Inventories

5. Questions

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