IPSAS 12

INVENTORIES
 Overview
IPSAS 12 covers inventories. Inventories include:

• goods purchased and held for resale;

• work-in-progress;
• finished goods;

and are of major significance to some public

sector entities.
 Overview
~ In the public sector, where inventories
are often held for distribution or for use in
the provision of services at no or nominal
consideration and where inventories may
be acquired for no or nominal
consideration.
 IPSAS 12
• The objective of IPSAS 12 is to prescribe the
accounting treatment for inventories.

• The main issue in accounting for inventories

is determining what amount of cost should be
carried forward as an asset until related
revenues are recognised, or until the inventories
are distributed or used to provide services.
 IPSAS 12
Inventories in the public sector may include:
• ammunition;
• consumable stores;
• maintenance materials;
• spare parts for plant and equipment, other than
those dealt with in standards on property, plant and
equipment;
• strategic stockpiles (for example, energy reserves);
 IPSAS 12
Inventories in the public sector may include:

• stocks of un-issued currency;

• postal service supplies held for sale (for example, stamps),
and;
• work-in-progress, including:
- educational/training course materials;
• client services (for example, auditing services), where those
services are sold at arm’s length prices, and; land/property
held for sale.
 Measurement
~ Inventories shall be measured at the lower of cost and net
realisable value.
a. Cost
The cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to
their present location and condition.

b. Net realisable value (NRV)

The net realisable value is the estimated selling price in the ordinary
course of operations, less estimated costs of completion and the
estimated costs necessary to make the sale, exchange or distribution.
This is sometimes referred to as fair value less costs to sell.
 Measurement
Cost:
The costs of purchase of inventories comprise:
• the purchase price;
• import duties and other taxes, and;
• transport, handling and other costs
directly attributable to the acquisition of
finished goods, materials, and supplies
 Cost formulas
~IPSAS 12 states that there are two cost
formulas that can be used: first-in, first- out
(FIFO) or weighted average cost (WAC)

The last-in, first-out (LIFO) formula is not

allowed per IPSAS 12.
An entity shall use the same cost formula for
all inventories of a similar nature.
 Cost formulas- Example
Let us assume that the oil was purchased as follows:
Purchased Litres £ per litre
3rd January 500 0.44
9th March 600 0.48
1st May 500 0.50
22nd July 600 0.51
13th September 500 0.53
30th November 700 0.55
• Assume 1,000 litres left at the end of the year
 Cost formulas- Example
Solution:
FIFO Approach-

The cost of the inventory to be shown on the

statement of financial position will be
(700 * £0.55) + (300 * £0.53) = £544.
 Cost formulas- Example
Weighted average approach:
   
  Litres purchased      
/(used) £ £/ litre
       
Opening
460 184 0.40
       
3rd January
500 220 0.44
Weighted average recalculated        
after purchase 960 404 0.42
       
12th January 1
(220) (92) 0.42
       
1st March1
(150) (63) 0.42
       
9th March
600 288 0.48
Weighted average recalculated        
after purchase 1,190 537 0.45
 Net realisable value (NRV )
~The net realisable value is the estimated
selling price in the ordinary course of
operations less estimated costs of completion
and the estimated costs necessary to make the
sale, exchange or distribution.
 Net realisable value (NRV )
~Net realisable value must be reassessed and
compared with cost at the end of each period,
and previous write-downs reversed if NRV has
risen above cost.
 Net realisable value (NRV )
Example:
~Manufacturing costs in 20X0 for inventory held at
the year-end are £60 million. All goods held at the
year-end were sold in January 20X1, for £50 million.
The selling costs incurred for the goods sold in
January 20X1 were £4 million.

At what value should inventory be held on the SOFP

as at 31 Dec 20X0?
 Net realisable value (NRV )
Solution:

Cost = £60m
NRV = £50m – £4m = £46m

So lower of cost and NRV = £46m

 Net realisable value (NRV )
~Other important points-
• In the case of incomplete items of inventories, NRV takes account of the
costs to complete.
• In making the assessment of whether NRV is lower than the cost of
inventory it may be appropriate to group items together. However, items
should only be grouped together when the individual items cannot be
valued separately. It is not appropriate to treat a whole class of inventory,
for example all goods held for sale, as a group. If NRV is less than cost
the write down of inventory will also be made on a group basis.
• In the absence of a contractually agreed selling price, the best estimate is
the likely selling price, less appropriate deductions.
• Materials to be incorporated into a finished good should only be written
down if the eventual finished good will be sold for less than the total
cost.
 Inventories – other considerations
IPSAS 12 provides that where:

• Inventories are acquired through a non-exchange

transaction, their cost shall be measured at
their fair value as at the date of acquisition

For example, an international aid agency may

donate medical supplies to a public hospital in
the aftermath of a natural disaster.
 Inventories – other considerations
IPSAS 12 provides that where:

• Inventories are held for distribution, or

consumption in the production process of goods
to be distributed at no charge or for a nominal
charge, they are measured at the lower of cost
and current replacement cost.

For example, a fire and rescue authority may distribute

fire alarms free of charge to vulnerable households.
 Inventories – other considerations
Illustration:-
A local supermarket has donated several tonnes of tinned food to a food
bank run by a local authority. The food will be distributed free of charge
to local families in need.

The food cost the supermarket £14,000. At the date when the food was
delivered to the bank, the total fair value was £13,200. The current
replacement cost at the reporting date is £12,600. If the food bank was to
sell each item of food individually at normal retail prices to local
residents, the total net realisable value would be £16,500.
Requirement:
Assuming that all the food is still held in inventory at the year-end, at
how much would the authority value the food under IPSAS 12
Inventories?
 Inventories – other considerations
Solution:-
Since the food was acquired through a non-exchange
transaction,
• the cost is measured at the fair value at the
date of acquisition per paragraph 16 (i.e. £13,200).
• So the lower of (deemed) cost of £13,200 and
current replacement cost of £12,600 is £12,600, i.e.
it should be held at current replacement cost of
£12,600 in the authority’s statement of financial
position.
 Recognition
• When inventories are sold, the carrying amount is recognised
as an expense in the period in which the related revenue is
recognised.

• If there is no related revenue, the expense is recognised when

the goods are distributed or the related service is rendered.

• Any write-down of inventories to NRV and all losses of

inventories are recognised.

• Any reversal of any write-down of inventories, arising from an

increase in NRV, is recognised.
 Disclosure
The financial statements should disclose the:

• Accounting policies adopted in measuring inventories, including the cost

formula used;
• Total carrying amount of inventories classified in a manner appropriate to
the entity;
• Carrying amount of inventories held at fair value less costs to sell
(i.e. net realisable value);
• Amount of inventories recognised as an expense during the period;
• Amount of any write-down that is recognised as an expense during the period;
• Amount of any reversal of a write-down that is recognised during the period,
along with a description of the circumstances or events that led to the reversal;
and
• Carrying amount of inventories pledged as security for liabilities.