IPSAS 12 INVENTORIES

OUTLINE

• Objectives
• Assessing NGO’s current practices
• What is in IPSAS 12
3.1 Scope of application and key concepts
3.2 Recognition & Measurement
3.3 Disclosures

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 1. OBJECTIVES

 Explain the definition of inventories;

 Describe how inventories are recognized and measured;
 Specify the disclosure requirements for inventories.
 2 ASSESSING LIP’S CURRENT PRACTICES

• Definition
• Inventories are those assets which is consumable in the year.
• Management
• Accounting treatment
• It is common to many NGOs in Ethiopia are recording
purchase of Inventories as expenditures in the year of
purchase.
• Costing and Internal control
• Purchase and related cost that makes the Inventories usable
are considered as the cost of the asset.
• Disposal
• Assets are disposed while it is no more used. The disposal
proceed or cost may be consider as revenue or expense.
 3 WHAT IS IN IPSAS 12

3.1. SCOPE OF APPLICATION AND KEY CONCEPTS

DEFINITION OF INVENTORIES

 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
in the rendering of services.

 Covers all inventories other than:

 WIP under construction contracts
 Financial instruments
 Agricultural and forest products, mineral ores and biological assets
3 WHAT IS IN IPSAS 12

3.2 RECOGNITION & MEASUREMENT

MEASUREMENT OF INVENTORIES

• Inventories shall be measured at the lower of cost and net realizable value or
at the lower of cost and current replacement cost, except where inventories
are acquired through a non-exchange transaction, where cost shall be
measured at the fair value as at the date of acquisition.

• Net realizable value refers to the net amount that an entity expects to realize
from the sale of inventories in the ordinary course of operations.

• Except for inventories held for distribution at no or nominal charge,

inventories should be written down to net realizable value where this falls
below cost.
MEASUREMENT OF INVENTORIES

 Inventories shall be measured at the lower of cost and current

replacement cost where they are held for:
 Distribution at no charge or for a nominal charge; or
 Consumption in the production process of goods to be distributed at no charge
or for a nominal charge.

 Inventories held for distribution at no or nominal charge, current

replacement cost is the cost that would be incurred to acquire the asset
on the reporting date. If the inventories cannot be acquired on the
open market, then an estimate of replacement cost must be made.
COST OF INVENTORIES

 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.
 COSTS TO BE INCLUDED

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

Any other costs that are

- Rebates incurred in bringing the
- Tax (customs/VAT) inventories to their
present location and
- Transport
condition
- Handling costs Cost of Other
attributable to the Purchase Costs
acquisition

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

 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
 For inventories with a different nature or use, different cost formulas may be
justified.
WORKED EXAMPLE – INVENTORY COSTING- FIFO and WAC

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

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

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

TWO METHODS OF ACCOUNTING

 Perpetual – each movement in or out is accounted for

individually; the level of inventories is known at each
precise moment in time
 Periodic– inventories get adjusted based on periodic
counts of physical inventory
RECOGNITION AS AN EXPENSE

 When inventories are used, distributed or sold, the carrying amount

of those inventories shall be recognized as an expense in the period
in which the related consumption, service provision or revenue is
recognized.
 The amount of any write-down of inventories to net realizable value
and all losses of inventories shall be recognized as an expense in the
period the write-down or loss occurs.
 The amount of any reversal of any write-down of inventories,
arising from an increase in net realizable value, shall be recognized
as a reduction in the amount of inventories recognized as an
expense in the period in which the reversal occurs.
DISCLOSURES

The financial statements shall disclose:

 The accounting policies adopted in measuring inventories,

including the cost formula used;
 The total carrying amount of inventories and the carrying
amount in classifications appropriate to the entity;
 The carrying amount of inventories carried at fair value less costs
to sell;
 The amount of inventories recognized as an expense during the
period;
DISCLOSURES (CONT.)

 The amount of any write-down of inventories recognized as an

expense in the period;
 The amount of any reversal of any write-down that is recognized
as a reduction in the amount of inventories recognized as
expense in the period;
 The circumstances or events that led to the reversal of a write-
down of inventories; and
 The carrying amount of inventories pledged as security for
liabilities.
SUMMARY

Done
 OBJECTIVES

 Explain the definition of inventories;

 Describe how inventories are recognized and measured;
 Specify the disclosure requirements for inventories.
Thank you!!!

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