IFRS: an approach to inventory accounting. Accounting and valuation of inventory according to Russian and international standards Write-off of obsolete inventories in IFRS
O.V. Dyatlova,
Ph.D. econ. sciences,
associate professor of the department accounting And
RGSU statistics
Auditor,
№5 (May) 2015
Inventory accounting
According to the order of the Ministry of Finance of Russia dated November 25, 2011 No. 160n, in the territory Russian Federation from the date of official publication, 37 International Financial Reporting Standards (IFRS) and 26 Interpretations of International Standards come into force. At the same time, on the territory of Russia official application receives the Russian-language version of IFRS.
Accounting for inventories and the procedure for their reflection in financial statements in international standards is regulated by IFRS 2 “Inventories”, and in Russia - PBU 5/01 “Accounting for inventories”. However, IFRS 2 cannot be applied to work in progress arising during the execution of construction contracts, to inventories of agricultural and forestry products, as well as to minerals.
In international accounting, inventories are defined as assets held for sale during the normal business cycle or for production consumption for the purpose of manufacturing and selling products.
According to IFRS 2, inventories are assets that:
- firstly, intended for sale during ordinary activities;
- secondly, created in the production process for such sale (finished goods, work in progress, raw materials);
- thirdly, they exist in the form of raw materials and materials intended for use in the production process or in the provision of services.
While international standards define inventories as assets, PBU 5/01 “Accounting for inventories” considers them as property.
According to IFRS 2, inventories include finished goods, work in progress, raw materials and materials intended for further use in the production process, its maintenance or for economic needs, as well as goods purchased and stored for resale. Land and other property are also considered inventories if they have been acquired and are intended for resale. Therefore, stocks are:
- goods, land and other property purchased and held for resale;
- finished products produced by the company;
- unfinished products produced by a company, including raw materials and materials intended for further use in the production process.
If the company's activities are related to the service sector, inventories include costs for services, revenue from the provision of which has not yet been recognized (i.e., unfinished activities of auditors, architects, lawyers, etc.).
For the purposes of accounting for inventories, IFRS 2 suggests classifying them into one of the following groups: raw materials, supplies, work in progress, finished goods.
According to PBU 5/01, inventories are assets that:
- firstly, they are used as raw materials in the production of products;
- secondly, they are used for sale;
- thirdly, they are used for management needs.
In accordance with the Russian accounting procedure, inventories are goods purchased from other persons and intended for sale, raw materials and materials used for production or management needs, as well as finished products as end result production cycle. Designated assets are included in inventories according to IFRS 2. However, for the item work in progress, which is one of the groups of inventories according to IFRS 2, PBU 5/01 does not apply.
At the same time, the Accounting Regulations “Accounting Statements of an Organization” (PBU 4/99) recognizes assets recognized as work in progress as inventories.
Thus, we can say that in terms of inventory accounting, IFRS 2 and Russian accounting standards are identical.
Inventory recognition
In financial statements, inventories can be recognized as assets and as expenses.
Inventories are recognized as an asset when:
- it is probable that the firm will receive future economic benefits associated with the asset;
- the value of the asset can be reliably measured.
The moment when an asset is recognized does not always coincide with the moment when ownership of the inventory passes. The main parameter that determines the moment of recognition of inventories as an asset is the transfer to the buyer of all risks and benefits of owning them.
Inventories are recognized as an expense when they are sold. The cost of inventories is written off as expenses, including reporting period when the related income is recognized. In addition, any writedown of inventory to net realizable value and all inventory losses must be recognized as an expense in the period the write-down or loss occurs. Conversely, the amount of the return of any partial write-down of inventories should be recognized as a reduction in expenses in the period of revaluation.
Reserve valuation
Initial assessment inventories, according to IFRS 2, can be carried out using one of three methods:
- at cost of inventories;
- according to standard costs;
- at retail prices.
Under the inventory cost method, all acquisition costs, processing costs and other costs incurred to bring the inventory to its present location and condition are taken into account.
Standard cost method. Standard costs take into account normal levels use of raw materials, labor, efficiency and power; they should be checked regularly and revised if necessary.
The retail price method is used by firms engaged in retail trade y, for valuing inventories consisting of a large number of rapidly changing items (having the same margin), for which it is inappropriate to use other cost estimation methods.
The cost of inventories is determined by the decrease total cost inventory sold by the corresponding gross margin percentage. The percentage used takes into account inventory that has been reduced in price below the original selling price. An average percentage is often used for each retail division.
However, the cost of inventories does not include the following costs:
- excess costs of raw materials;
- storage costs;
- administrative overhead;
- business expenses.
The indicated costs are reflected as expenses for the period in which they were incurred.
According to IFRS 2, the valuation of inventories released into production (or sold externally) must be made by identifying the firm's costs with specific types of inventories. This requirement applies to those types that:
- cannot be considered interchangeable;
- manufactured or intended to fulfill a special order.
If identification of costs is impossible and inventories do not meet the two criteria above, you can apply the main and alternative approaches (the alternative approach, or the LIFO method, is prohibited for use from January 1, 2005) to estimate consumed inventories.
The main approach includes the following methods for estimating reserves:
- FIFO method (first in - first out);
- weighted average cost method;
- specific identification method.
A firm that prepares financial statements based on IFRS must use the same method of calculating the cost of inventory for all types of inventory that are of the same nature. The chosen method for valuing inventories should be disclosed in the company's accounting policies.
FIFO method. This method assumes that the inventory items purchased first will be the first, and therefore the items remaining in inventory at the end of the period will be purchased or produced last.
Weighted average cost method. With this method, the cost of each item is determined based on the weighted average cost of similar items at the beginning of the period and the cost of the same items purchased or produced during the period. The average may be calculated periodically or as each additional delivery is received, depending on the firm's operating conditions.
Specific identification method. The cost of individual items of inventory that are not fungible, as well as goods or services produced and intended for special projects, should be determined by specifically identifying individual costs. This inventory display method is suitable for items intended for special projects, whether purchased or manufactured. However, specific cost identification does not apply when there are a large number of inventory items that can be substituted. In such circumstances, a method of valuing those items that remain in inventories may be used to obtain the estimated effect on net profit or loss for the period.
The considered valuation methods in IFRS 2 are called formulas for calculating the cost of inventories. A firm must use identical formulas to value homogeneous inventories that are similar in how they are used. For different types stocks can be used in various forms.
PBU 5/01 “Inventory Accounting” contains recommendations for inventory accounting for Russian companies, based on the use of three methods for determining the cost of inventories:
- at the cost of each unit;
- at average cost;
- at the cost of the first acquisition of inventories.
As you can see, despite some terminological differences, the inventory accounting methods proposed by Russian accounting standards are generally identical to those recommended by IFRS 2.
Disclosure of inventories in the notes to the financial statements. In the notes to the financial statements, according to PBU 5/01, it is necessary to disclose:
- the accounting policies adopted for the valuation of inventories, including the method used to calculate their cost;
- the total book value of inventories, including the book value of inventories by groups and subgroups of the classification adopted by the company (for example, the cost of goods for sale, work in progress);
- the carrying amount of inventories carried at net recoverable realizable value;
- the amount of inventory recognized as an expense during the current period, etc.
Thus, in modern conditions, intensive economic development leads to close cooperation between Russia and other countries. At the same time, against this background of intensively developing financial relations There is an expansion of export and import of goods and services, and exchange of information. Interaction between domestic and foreign firms is impossible without reading and analyzing accounting information, including reporting. In this regard, it is of particular importance to bring the Russian financial statements to uniform international standards.
Literature
1. Federal law dated July 27, 2010 N 208-FZ “On Consolidated Financial Statements”.
2. Order of the Ministry of Finance of Russia dated November 25, 2011 No. 160n “On the implementation of International Financial Reporting Standards and Explanations of International Financial Reporting Standards on the territory of the Russian Federation.”
3. Accounting regulations “Accounting for inventories” PBU 5/01 (approved by order of the Ministry of Finance of Russia dated July 9, 2001 No. 44n).
4. Dmitrieva I.M. IFRS for small and medium-sized businesses non-financial assets// Auditor. - 2013. - No. 11 (225). - pp. 53-57.
5. Dyatlova O.V. Transformation of investment policy in new economic conditions // Social policy and sociology. - 2013. - No. 1 (91). - pp. 87-98.,
6. Dyatlova O.B. Trademark and its meaning in Russia and abroad // Social policy and sociology. - 2009. - No. 7. - P. 114-122.
7. Soliia E.E. A decent standard of living for a person in an innovative economy // Bulletin of Economic Integration. - 2014. - No. 6 (75). - P. 74-80.
Target
1 Purpose of this standard IAS 2- determine the procedure for inventory accounting. The key issue in accounting for inventories is determining the amount of cost that is recognized as an asset and carried forward until the corresponding revenue is recognised. This standard provides guidance on the determination of costs and their subsequent recognition as expenses, including any write-down to net realizable value. It also provides guidance on the costing methods used to allocate costs to inventory.
Scope of application
2 This IAS 2 Standardapplies to all stocks except the following:
- (a) work in progress arising from construction contracts, including directly related service contracts (see IAS 11 Construction Contracts);
- (b) financial instruments (see IAS 32 "Financial instruments: presentation of information" and IAS 39 "Financial instruments: recognition and measurement");
- (c) biological assets related to agricultural activities and agricultural products at the time of harvest (see IAS 41 « Agriculture» ).
3 This Standard does not apply to the measurement of inventories held by:
- (a) Producers of agricultural and forestry products, post-harvest agricultural products, and minerals and mineral products, provided they are measured at net selling price in accordance with generally accepted accounting practices in those industries. If such inventories are measured at net realizable price, changes in that price are recognized in profit or loss in the period in which the changes occur.
- (b) Commodity broker-traders who measure their inventories at fair value less costs to sell. If such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognized in profit or loss in the period in which the changes occur.
4 Inventories referred to in paragraph 3(a) are measured at net realizable value at specified stages of production. This occurs, for example, when agricultural products or minerals have been harvested and their sale is guaranteed by a forward contract or government guarantee, or when there is an active market and the risk of non-sale is negligible. The only measurement requirements of this standard do not apply to such inventories.
5 Broker traders are persons who buy or sell goods on behalf of others or for their own account. The inventories referred to in paragraph 3(b) are primarily purchased for the purpose of selling in the foreseeable future and profiting from fluctuations in price or broker-trader margin. If such inventories are measured at fair value less costs to sell, they are exempt from the measurement requirements of this standard.
Definitions
6 The following terms are used in this standard with the meanings specified:
Inventories are assets:
- (a) held for sale in the ordinary course of business;
- (b) in the process of being manufactured for such sale; or
- (c) in the form of raw materials or materials that will be consumed in the process of production or provision of services.
Net selling price is the estimated selling price in the ordinary course of business less the estimated costs to complete production and the estimated costs to be incurred to sell.
Fair value - the amount for which an asset can be exchanged or a liability settled in a transaction between knowledgeable, willing parties in an arm's length transaction.
7 Net realizable value refers to the net amount that an entity expects to receive from the sale of inventory in the ordinary course of business. Fair value reflects the amount at which the same inventory could be exchanged in the marketplace between knowledgeable buyers and willing sellers. The former represents an enterprise-specific cost, the latter does not. The net realizable price of inventories may differ from fair value less costs to sell.
8 Inventories also include goods purchased and held for resale, including, for example, goods purchased by a retailer and held for resale, or land and other property held for resale. Inventories also include a business's finished goods or work in progress, including raw materials and materials intended for use in the production process. If we're talking about about a service provider, inventories include costs of providing services as described in paragraph 19 for which the entity has not yet recognized related revenue (see IAS 18 "Revenue").
Inventory measurement
9 Inventories should be measured at the lower of cost or net realizable value.
Cost of inventory
10 The cost of inventories shall include all acquisition costs, conversion costs and other costs incurred to maintain the current location and condition of the inventories.
Acquisition costs
11 Costs for the acquisition of inventories include the purchase price, import duties and other taxes (except for those that are subsequently reimbursed to the enterprise by tax authorities), as well as the costs of transportation, loading and unloading and other costs directly attributable to the acquisition of finished products, materials and services. Trade markdowns, discounts and other similar items are deductible in determining acquisition costs.
Processing costs
12 Inventory conversion costs include costs, such as direct labor, that are directly related to the production of products. They also include systematically allocated fixed and variable manufacturing overhead costs incurred in processing raw materials into finished products. Fixed manufacturing overheads are indirect manufacturing costs that remain relatively constant regardless of production volume, such as depreciation and maintenance of factory buildings and equipment, and production-related management and administrative costs. Variable manufacturing overheads are indirect manufacturing costs that are directly or nearly directly related to production volume, such as indirect raw material costs or indirect labor costs.
13 The allocation of fixed manufacturing overhead to processing costs is based on the normal production capacity of the manufacturing facility. Normal productivity is the amount of production that is expected to be obtained based on the average of a number of periods or seasons of operation in normal conditions, taking into account productivity losses due to scheduled maintenance. Actual production can be used if it approximates normal production. The amount of fixed overhead allocated to each unit of output is not increased as a result of low production levels or idle time. Unallocated overhead costs are recognized as an expense in the period incurred. During periods it is unusual high level production, the amount of fixed overhead costs allocated to each unit of production is reduced so that inventory is not valued above cost. Variable manufacturing overhead is charged to each unit of production based on actual capacity utilization.
14 A manufacturing process may produce more than one product at a time. This occurs, for example, in the production of co-products or a main product and a by-product. If processing costs for each product cannot be identified separately, they are allocated among the products on a proportional and consistent basis. For example, allocation may be made based on the relative sales value of each product, either at the stage of the production process when the products become separately identifiable or at the completion of production. Most by-products are not significant in nature. In such cases, they are often measured at net selling price, and this value is deducted from the cost of the underlying product. As a result, the book value of the main product differs slightly from its cost.
Other costs
15 Other costs are included in the cost of inventories only to the extent that they are incurred to maintain the current location and condition of the inventories. For example, it may be appropriate to include non-manufacturing overhead or customer-specific product development costs in inventory costs.
16 Examples of costs that are not included in the cost of inventories and are recognized as expenses in the period incurred are:
- (a) excess losses of raw materials, labor or other production costs;
- (b) storage costs, unless they are required during the production process to move to the next stage of production;
- (c) administrative overhead that does not contribute to maintaining the current location and condition of inventory;
- (d) selling costs.
17 IAS 23 "Borrowing Costs" defines those rare cases when borrowing costs are included in the cost of inventory.
18 An enterprise can purchase inventories on deferred redemption terms. If the agreement actually contains a financing element, such element, for example the difference between the purchase price on conventional trade credit terms and the amount paid, is recognized as interest expense over the financing period.
Service Provider Inventory Cost
19 To the extent that service providers hold inventories, they measure these inventories by the cost of producing them. These costs consist primarily of labor and other costs for personnel directly involved in the provision of services, including personnel performing supervisory functions and allocated overhead costs. Labor and other costs related to personnel engaged in sales and general administrative functions are not included in the cost of inventories but are recognized as expenses in the period incurred. The cost of service provider inventory does not include profit margins or non-allocable overhead costs, which are often built into the prices charged by service providers.
Cost of harvested agricultural products derived from biological assets
20 In accordance with IAS 41 "Agriculture" Inventories, consisting of harvested agricultural products that an entity obtains from its biological assets, are measured at initial recognition at fair value at the time of harvest less estimated costs to sell. This is the cost of inventories at that date for the purposes of this Standard.
Cost measurement methods
21 For convenience, inventory cost measurement methods such as the standard costing method or the retail price method may be used if the results of their application approximately correspond to the cost value. Standard costs take into account normal levels of raw material consumption, labor, efficiency and productivity. They are regularly reviewed and, if necessary, revised to take into account current conditions.
22 The retail price method is often used in retailing to measure inventory that consists of a large number of rapidly changing items with equal profit margins for which other costing methods are impracticable. The cost of a unit of inventory is determined by reducing the selling price of that unit of inventory by the appropriate percentage of gross profit. In determining the percentage to be used, inventory that has been reduced in value below its original selling price is taken into account. An average percentage for each retail department is often used.
Cost calculation methods
23 The cost of inventories of items that are not generally fungible, as well as goods or services produced and allocated to specific projects, should be determined using specific identification of specific costs.
24 Specific cost identification means that specific costs are allocated to identified inventory items. This accounting treatment is appropriate for items allocated to specific projects, regardless of whether they were purchased or produced. However, specific identification of costs is not appropriate in cases where there are a large number of inventory items that are usually fungible. In such cases, a method of selecting those inventory items that remain in inventory could be used to obtain a predetermined amount of impact on profit or loss.
25 The cost of inventories other than those discussed in paragraph 23 shall be determined using the first-in, first-out (FIFO) method or the weighted average cost method. An entity must use the same costing method for all inventories of the same nature and use by the entity. For stocks of different nature or use, it may be justified to use different ways cost calculation.
26 For example, inventory used in one operating segment , may be used differently by the entity than similar inventories in another operating segment. However, differences in the geographic location of inventories (or applicable tax rules) are not, in themselves, sufficient reasons to use different costing methods.
27 The FIFO method assumes that those items of inventory that are purchased or produced first will be sold first and that, accordingly, those items that remain in inventory at the end of the period will be purchased or produced last. According to the weighted average cost method, the cost of each item is determined based on weighted average the cost of similar items at the beginning of the period and the cost of similar items purchased or produced during the period. The average value can be calculated on a periodic basis or upon receipt of each new batch, depending on the specifics of the enterprise's activities.
Net selling price
28 The cost of inventories may not be recoverable if they are damaged, become completely or partially obsolete, or have a reduction in their selling price. The cost of inventory may also not be recoverable if estimated completion costs or estimated selling costs increase. The practice of writing down inventories below cost to net realizable value is consistent with the principle that assets should not be carried at a cost in excess of the amount that can be expected to be realized from their sale or use.
29 Inventories are generally written down to net realizable value on an itemized basis. However, in some cases it may be appropriate to group similar or related items together. This may occur with inventory items that are in the same product line, have the same purpose or end use, are produced and sold in the same geographic area, and are impracticable to value separately from other items in the same product line. An inappropriate approach is to write off inventory based on its classification, such as writing off finished goods or writing off all inventory in a particular industry or geographic segment. Service providers typically accumulate costs for each service, for which a separate selling price is determined. Accordingly, each such service is considered as a separate item.
30 Estimates of net realizable value are based on the best available evidence of the amount that can be realized from the sale of inventories at the time such estimates are made. These estimates take into account fluctuations in price or cost that are directly attributable to events occurring after the end of the period to the extent such events are consistent with conditions that existed at the end of the period.
31 Estimates of net realizable value also take into account the purpose of the inventory held. For example, the net selling price of inventory held to fulfill contracts for the sale of goods or services at fixed prices is determined based on the price specified in those contracts. If the amount of inventory available to fulfill sales contracts is less than the total amount of related inventory, the net selling price of the excess is determined based on the total selling prices. An excess of inventory volumes under contracts for the sale of goods at fixed prices over the volume of available inventories or from contracts for the purchase of inventories at fixed prices may result in valuation reserves. Such provisions are the subject of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
32 Raw materials and other materials intended for use in the production of inventories are not written down below cost if the finished products in which they will be included are expected to be sold at a price at or above cost. However, if a decrease in the price of raw materials indicates that the cost of finished goods exceeds the net realizable value, the raw materials are written down to the eventual net realizable value. In such cases, the cost of replacing the raw material may be the best available estimate of its net realizable value.
33 In each subsequent period, the net realizable value is remeasured. If the circumstances that necessitated the write-down of inventories below cost cease to exist, or there is clear evidence of an increase in net realizable value due to changed economic conditions, the previously written-down amount is reversed (i.e., the reversal is made to the extent of the original write-down) so that the new the carrying amount corresponded to the lower of cost or revised net realizable value. For example, this occurs when an item of inventory carried at net realizable value due to a decrease in selling price earlier is still in inventory in a subsequent period and its selling price has increased.
Recognition as an expense
34 When inventories are sold, the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognised. The amount of any writedown of inventory to net realizable value and all inventory losses must be recognized as an expense in the period in which the writedown or loss occurs. The amount of any reversal of an inventory write-down made in connection with an increase in net realizable price shall be recognized as a decrease in the amount of inventories recognized as expense in the period in which the reversal is made.
35 Some inventories may be allocated to other asset accounts, for example, inventories used as a component of property, plant and equipment created on our own. Inventories allocated to other assets are recognized as expenses over the useful life of the relevant asset.
Disclosure
36 Financial statements should disclose:
- (a) principles accounting policy adopted for measuring inventories, including the method used to calculate costs;
- (b) the total carrying amount of inventories and the carrying amount of inventories by type,
- used by this enterprise;
- (c) the carrying amount of inventories measured at fair value less costs to sell;
- (d) the amount of inventories recognized as an expense during the reporting period;
- (e) the amount of any writedown on inventories recognized as an expense in the period in accordance with paragraph 34;
- (f) the amount of any reversal entry for an writedown that was recognized as a decrease in inventories recognized as an expense in the reporting period in accordance with paragraph 34;
- (g) the circumstances or events that led to the reversal of the writedown of inventories in accordance with paragraph 34;
- (h) the carrying amount of inventories pledged as security for the performance of obligations.
37 Information about the carrying amounts by type of inventory and the extent of changes in those assets is useful to users of financial statements. Typically, inventories are divided into the following types: goods, raw materials, supplies, work in progress and finished goods. The service provider's inventory may be accounted for as work in process.
38 The amount of inventory recognized as an expense during the period, often referred to as cost of sales, consists of those costs that were previously included in the measurement of inventory already sold, as well as unallocated manufacturing overhead and excess manufacturing cost of inventory. The specifics of the enterprise's activities may also require the inclusion of other amounts, such as sales costs.
39 Some entities use an income statement format that discloses values other than the cost of inventories recognized as an expense during the period. Under this format, an enterprise presents a cost analysis using a classification based on the nature of the costs. In this case, the entity discloses the costs recognized as expenses in relation to raw materials and consumables, labor and other costs, together with the amount of the net change in inventory balances for the period.
Effective date
40 An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Early application is encouraged. If an entity applies this Standard for a period beginning before 1 January 2005, it must disclose that fact.
Termination of other documents
41 This Standard replaces IAS 2 "Stocks"(revised 1993).
42 This standard replaces SIC Interpretation 1 "Subsequence: various ways calculating the cost of inventories."
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The economic rapprochement of the two countries is increasingly influencing the pace and nature of economic and social development, the general political situation in the world, and opens up great opportunities for economic cooperation between states.
In connection with the creation of a new mechanism for foreign economic activity, simplification of the entry of enterprises and organizations into the foreign market, expansion of the activities of joint ventures, there is a need to study and use by enterprises of the Russian Federation the basic principles of organizing accounting and reporting of foreign countries.
Today, Russian accounting is going through an important interesting period - gradual convergence with the practices adopted in countries with market economy. The problem of introducing international financial reporting standards (IFRS) in Russia is moving from the stages of many years of discussion to the stage of practical implementation.
IFRS 2 INVENTORIES
IFRS 2 Inventories defines the amounts of costs that should be recognized as an asset and provides practical guidance on how costs are determined and subsequently recognized as an expense, including any reductions to net realizable value. It also provides insight into the costing formulas used to determine inventory costs.
Inventories-assets:
held for sale in the ordinary course of business;
in the course of production for such sale;
in the form of raw materials or materials intended for use in the production process or in the provision of services;
Thus, any inventory items, with the exception of:
work in progress arising during the implementation of construction contracts, including directly related contracts for the provision of services. Such work is accounted for in accordance with IFRS 11 “Contracts”;
financial instruments
biological assets associated with agricultural activities, which are accounted for in accordance with IAS 41 Agriculture. Such assets include animals and plants that produce agricultural products.
In addition, the following inventories are not measured in accordance with IFRS 2 Inventories:
inventories of livestock, agricultural and forestry products, as well as minerals, mineral products and agricultural products, if they are recorded at net realizable value at specified stages of production in accordance with accepted rules accounting in certain industries;
inventories held by commodity broker-dealers that trade on a commodity exchange and are measured at fair value less costs to sell.
When such inventories are measured at fair value less costs to sell, any changes in valuation are recognized as profit or loss in the period in which the changes occur.
Classification of reserves.
IFRS 2 “Inventories” provides for the possibility of distinguishing several classes of inventories:
goods purchased and stored for resale;
finished products produced by the company;
work in progress;
raw materials and materials intended for further use in the production process.
A service company's inventory may be classified as work in progress.
Recognition of inventories.
IFRS 2 does not define criteria for the recognition of inventories, but based on the principles of IFRS regarding asset recognition, inventories are recognized as an asset when:
it is more likely that the company will receive future economic benefits associated with the asset;
the value of the asset can be reliably estimated.
The moment when an asset is recognized does not always coincide with the moment when ownership of the inventory passes. The main parameter determining the moment of recognition of inventories as an asset is the transfer to the buyer of all risks and rewards of their ownership.
Valuation of reserves.
As a matter of prudence, inventories are valued at the lower of cost or net realizable value.
Cost of inventory is all acquisition costs, conversion costs and other costs incurred to bring the inventory to its present location and condition.
Net realizable value is the expected selling price in the normal course of business, minus possible costs to perform the work and possible costs to perform the work and possible costs to sell.
Fair value is the amount of money that would be sufficient to acquire an asset or settle a liability in a transaction between knowledgeable, willing parties in an arm's length transaction.
Thus, in the case of net realizable value, the value of inventories is formed based on the data of a specific organization, and in the case of fair value, based on the entire market of similar assets.
Acquisition costs - the purchase price, import duties, transportation, handling and other expenses directly attributable to the acquisition of the asset constitute the cost of inventory.
When determining the cost of purchasing inventory, trade discounts, chargebacks and other similar items must be excluded from this amount.
Inventory accounting in Russian accounting is regulated by PBU 5/01 “Accounting for inventories”, despite some differences in terminology, the first three methods are identical to those recommended by IFRS 2.
Calculation of the cost of inventories according to IFRS and PBU 5/01
Processing costs. Inventory conversion costs include costs that are directly attributable to a unit of production output.
Such costs include:
direct production costs;
manufacturing overhead
some other costs.
\Direct production costs. The peculiarity of direct manufacturing costs is that they can be directly attributed to a specific product. Direct costs usually include labor costs for production personnel and the costs of raw materials and basic materials.
All direct costs of production are reflected in the debit of the “Work in Progress” account.
Manufacturing overhead. Manufacturing overhead is a collection of various costs associated with production that cannot be directly allocated to specific finished goods. These expenses include:
auxiliary materials;
indirect labor costs (wages of auxiliary workers, overtime payments);
other indirect production costs(costs of maintaining workshop buildings, maintenance and current equipment repairs, utilities, rent, equipment depreciation).
Manufacturing overheads, relative to production volume, are divided into fixed and variable.
Fixed manufacturing overhead. Fixed manufacturing overhead costs are those indirect manufacturing costs that remain relatively constant regardless of production volume, but are measured on a per-unit basis based on the production level measurement. Examples of fixed manufacturing overhead costs include: depreciation, maintenance of buildings and equipment, rental costs, and administrative expenses.
The allocation of fixed manufacturing overhead to processing costs is based on normal capacity utilization levels.
During periods of unusually high production levels, the amount of fixed overhead allocated to each unit of output is reduced so that inventory is not valued above cost.
Variable manufacturing overhead. Variable manufacturing overhead costs are those indirect manufacturing costs that are directly or almost directly dependent on changes in production volumes, and are a constant value per unit of output. Examples of such costs are indirect labor costs and indirect raw materials costs.
Variable manufacturing overhead, like fixed manufacturing overhead, is subject to systematic allocation and is allocated to each unit of production based on actual capacity utilization.
Other expenses. Other costs can be charged to the cost of inventories only to the extent that they are associated with bringing the inventories to their required condition and location. Such costs may include the costs of developing specific products for specific customers.
Under the alternative permissible approach under IAS 23 Borrowing Costs, borrowing costs may be included in the cost of inventories if the inventories require a long period of time to become available and the borrowings must be directly attributable to the acquisition. construction or production of the asset. In addition, capitalization of such costs ceases when inventory preparation is completed.
The cost of inventory of the service provider company. The cost of inventory for a service company includes wages and other costs for personnel directly involved in providing the service, including management personnel, and related overhead costs. Labor costs and other expenses for commercial and general administrative personnel are not included in the cost of inventories, but are accounted for as expenses for the period in which they are incurred.
Co-produced and by-products. The result of the production process can be several products at the same time. This occurs when several products are jointly produced or when the production of the main product is accompanied by the production of a by-product. Most by-products are immaterial in nature, in which case they are valued at their net realizable value and this amount is calculated from the cost of the main product.
In this case, when the processing costs of each product cannot be determined separately, they should be distributed proportionally between the products. The allocation may be based on the relative sales value of each product. Relative sales value can be determined in one of the following steps:
at the stage of the production process when products become identifiable;
at the stage of appearance of the final product.
Methods for determining cost.
When determining the cost of inventories, two methods are used:
standard cost method;
retail price method.
Standard cost method. Standard costs take into account normal levels of use of raw materials, labor, efficiency and capacity. They should be checked regularly and revised if necessary.
Retail price method. The retail pricing method is often used in retailing to value inventory that consists of a large number of rapidly changing items that have similar margins and for which it is not practical to use other costing methods.
The cost of inventory is determined by reducing the total cost of inventory sold by the appropriate gross margin percentage. The percentage used takes into account inventory that has been reduced in price below the original selling price. For each retail manufacturer, the average percentage is used.
The following costs are not included in the cost of inventories:
excess costs of raw materials, labor expended or other excess production costs;
storage costs, except in cases where such storage is necessary during the production process;
administrative overhead costs that are not associated with bringing inventory to its current condition and location;
business expenses.
Such costs are recognized as expenses for the period in which they are incurred.
Methods for calculating the cost of inventories when selling them.
Prices for the same types of inventory purchased over different periods of time may vary significantly. As a result of the sale of inventories during the year, this fact affects the amount of inventory balances at the end of the reporting period and the cost of goods sold. Thus, since each type has its own specific price, which in turn affects the company's net profit, it is very important which valuation method the company chooses.
Basic methods for estimating reserves.
FIFO method (first in, first out);
weighted average cost method;
specific identification method.
An entity that prepares financial statements in accordance with IFRS must use the same method of calculating the cost of inventories for all types of inventories of a similar nature used in the entity. The chosen method for valuing inventories must be disclosed in the accounting policies of the enterprise.
FIFO method. The FIFO method assumes that the items of inventory purchased first will be sold first and, accordingly, the items remaining in inventory at the end of the period will be purchased or produced last.
Weighted average cost method. When using the weighted average cost method, the cost of each item is determined based on the weighted average cost of similar items at the beginning of the period and the cost of similar items purchased or produced during the period. The average may be calculated periodically or as each additional delivery is received, depending on the company's operating conditions.
Specific identification method. The cost of individual items of inventory that are not fungible, as well as goods or services produced or intended for special projects, should be determined by specifically identifying individual costs. This reflection method is suitable for items intended for special projects, whether purchased or manufactured. However, specific cost identification is not appropriate when there are a large number of inventory items that can be substituted. In such circumstances, a method of valuing those items that remain in inventories may be used to obtain the estimated effect on net profit or loss for the period.
Net realizable value. The cost of inventories may not be recoverable in the following cases:
damage or deterioration;
complete or partial obsolescence (obsolescence);
physical wear and tear;
reduction in selling price;
strategic decision of management to sell products at a loss (dumping)
errors in production or purchasing.
Inventories are generally written down to net realizable value on an item-by-item basis. However, in some circumstances it may be convenient to group similar or related articles together. The standard assumes several possible situations:
inventories belonging to the same product range;
inventories having the same purpose or end use;
Inventories produced or sold in a single geographic area;
inventories that practically cannot be valued separately from other inventories in the same range.
3Service companies usually accumulate costs for each service, for which a separate selling price will be set.
Net realizable value calculations are based on:
the amount of inventories intended for sale at the time of calculations. These calculations must take into account not only fluctuations in market prices before the reporting date, but also fluctuations in prices after the end of the period, to the extent such events confirm conditions that existed at the end of the period;
purpose of existing reserves. If inventory is held for sale, the net realizable value of inventory already held to fulfill the firm's sales or service contracts is based on a specific price.
In conditions where the net realizable value is reduced below the cost of finished products due to a decrease in the net realizable value of raw materials, the cost of replacing raw materials may be the best existing estimate of its net realizable value. Any writedown of inventory to the lower of cost or net realizable value must be recognized as an expense in the period in which the writedown actually occurs. A new estimate of net realizable value must be made in each subsequent period. It may be that the circumstances that caused inventories to be written down below cost have changed for the better or there is clear evidence that net realizable value has increased due to changes in economic conditions.
In this case, the write-off amount is restored in such a way that the new accounting value is the lesser of the two values - cost and the revised net realizable value.
Recognition as an expense. Once inventories are sold, the amount at which they were recorded must be recognized as an expense in the same period in which the corresponding income, that is, the proceeds from their sale, is recognized. This requirement is fully consistent with the matching principle of income and expenses defined in IFRS 18 Revenue - revenue and expenses relating to the same transaction or event are recognized simultaneously. Some inventories may be allocated to other asset accounts, such as inventories used in construction or production of a property, plant and equipment. In fact, it turns out that such inventories will be written off as enterprise expenses by depreciating the fixed asset over its service life.
Disclosure of information about reserves in financial statements.
The following information is required to be disclosed in the notes to the financial statements:
the accounting policies adopted for the valuation of inventories, including the method used to calculate their cost;
the total carrying amount of inventories and the carrying value of inventories by class;
the carrying amount of inventories recorded at net realizable value;
the amount of inventory recognized as an expense during the current period;
the amount of inventory write-off to net realizable value;
the circumstances or events leading to the return of inventory write-offs;
the amount of return of any write-off that is recognized as income in a given period;
the carrying amount of inventories pledged as collateral for obligations.
The cost of inventories expensed during the period consists of costs previously included in the valuation of items sold, unallocated manufacturing overhead and excess manufacturing costs associated with inventory. The specific nature of the company's activities may also require the inclusion of other costs, such as sales of products.
Conclusion:
The rules for accounting for inventories according to PBU 5/01 are in many ways close to the recommendations of IFRS 2, but at the same time they have some differences
|
Signs of comparison |
Unity |
Difference |
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Definition of reserves |
Unity of the definition of "reserves" |
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|
Reserve valuation |
Unity of the principle of valuation at the lower of cost and market price (possible net selling price) |
Differences in the rules for determining the smallest value |
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Actual cost |
Coincidence in certain situations of the list of costs included and not included in the actual cost |
Difference in inclusion of borrowing costs and excess costs in actual cost |
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Formulas for calculating the cost of inventory |
Identity of the three cost calculation methods |
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Disclosure of information about reserves in financial statements |
A number of identical indicators disclosed in financial statements in accordance with PBU 5/01 and IFRS 2 |
Information under IFRS 2 includes indicators not included in PBU 5/01 (on the restoration of written-off inventories) |
References:
International Accounting and Financial Reporting Standards
Under. ed.L. I. Ushvitsky. 2009
3Vakhrushina M. A., Melnikova L. A. Plaskova N. S. International financial reporting standards 2008
One of the main patterns modern development The Russian accounting system is its adaptation to Western systems based on international financial reporting standards (IFRS), which define general approaches to the formation of reporting indicators and offer options for accounting for individual funds and transactions in organizations. Therefore, studying current issues accounting for inventories, it is necessary to consider international standards of approaches to the qualification and recognition of inventories, their valuation, revaluation and release into production.
In international standards, the main accounting issues are reflected in IFRS “Inventories” (IFRS 2).
International financial reporting standard IFRS 2 defines inventories as assets:
Intended for sale in the normal course of business;
In the process of production for such sale;
In the form of raw materials or materials intended for use in a production process or in the provision of services.
According to the standard, reserves are classified as follows:
1. Goods, land and other property purchased and held for resale.
2. Finished products released by the company.
3. Work in progress produced by the company and including raw materials and materials intended for further use in the production process.
The standard does not apply to work in progress arising during the execution of construction contracts, to financial instruments, as well as livestock, agricultural and forestry products, and mineral ores. In accordance with IFRS 2, the cost of inventories must include all acquisition, processing and other costs incurred to bring the assets to their present location and condition.
Inventory acquisition costs include the purchase price, import duties and other taxes (other than those reimbursed by tax authorities), transportation, freight forwarding and other expenses directly attributable to the acquisition of finished products, materials and services.
Inventory conversion costs include direct costs directly associated with units of production, as well as systematically allocated fixed and variable manufacturing overhead costs for converting raw materials into finished products.
Other costs are included in the cost of inventories only to the extent that they are associated with bringing them to a condition in which they are suitable for further use.
In addition, IFRS 2 contains costs that cannot be included in the cost of inventories, but must be recognized as expenses in the period in which they are incurred. These include:
Excessive losses of raw materials, labor expended or other production costs;
Storage costs, unless they are necessary in the production process to move to the next stage;
Administrative overhead costs that are not associated with bringing inventory to its present location and condition;
Sales expenses.
IFRS 2 requires inventories to be measured at the lower of cost and net realizable value, the latter being the estimated selling price in the normal course of business less probable costs of completion and probable costs of selling.
Writing down inventories below cost to net realizable value is consistent with the view that assets should not be carried above the amounts expected to be realized from their sale or use.
The cost of inventory may not be recoverable if inventory is damaged, completely or partially obsolete, its selling price has decreased, or the potential costs of completing or making a sale have increased. Estimates of net realizable value are based on the best evidence available of inventory available for sale at the time the estimates are made. Raw materials and other supplies in inventories are not written down below cost if the finished goods in which they are included are expected to be sold at or above cost.
Thus, IFRS 2 provides a clearer definition of inventory valuation: inventories should be measured at the lower of cost and net realizable value; and the procedure for writing off inventories below cost is also disclosed in more detail.
IFRS 2 provides the following ways in which inventories can be written off.
1. Continuous identification method. It is used for inventories that are not fungible. That is, when it is known exactly which inventories remain in the warehouse and which are transferred to production or sold.
2. FIFO method. Inventories sold are assigned the cost of the first purchases. That is, the cost of inventories at the end of the period is determined by the prices of the latest receipts.
3. Average cost method - when all inventories have the same average price in the period. LIFO in international accounting has been abolished a long time ago (since January 1, 2005), as it was recognized as biased. Indeed, during a period of rising prices, of all the methods mentioned, the LIFO method gives the lowest net profit. IFRS 2 allows average cost to be calculated using periodic or continuous measurement.
In the case of services, inventory represents costs for services that have not yet been invoiced to the customer.
According to IFRS, inventories must be measured at the lower of cost and net realizable value, which is “the estimated selling price in the normal course of business less costs to complete and selling expenses.”
The cost of inventory includes all production, handling and other costs incurred to deliver, stock and bring the inventory into required condition. PBU 5/01 does not include processing costs that arise when processing materials into finished products as inventory costs.
Let us note that in international practice, in production the following are not included as costs: excess losses of raw materials, labor costs and other non-production costs; storage costs of finished products; general administrative expenses; selling expenses.
The same valuation method is used for all inventories having the same purpose.
In some cases, inventory is sold at a price below cost. In this case, the cost of inventories must be reduced to net realizable value by creating a reserve for impairment of inventories. A review of the net realizable value of all inventories should be made at each reporting period.
The main issue in inventory accounting is the amount of cost that should be recognized as an asset and carried forward until related revenue is recognised.
The cost of inventory includes all production, handling and other costs incurred to deliver, stock and bring the inventory into required condition. Costs consist of the purchase price, transportation and unloading costs. Taxes and import duties are also included in acquisition costs unless they are subject to government reimbursement. Trade and wholesale discounts are not taken into account when determining costs. They also represent manufacturing overhead costs that must be allocated systematically.
In a limited number of cases, borrowing costs may be included in the cost of inventories. These costs fall within the requirements of IFRS 23 “Borrowing Costs”. When goods are purchased on a deferred payment basis, the price includes an element related to the financing of the acquisition. In this regard, this element is recognized as interest expense during the loan period.
Examples of costs that are expensed in the period in which they are incurred are:
Excessive levels of production waste and labor and other production costs;
Costs of storing finished products;
General administrative expenses;
Selling expenses.
A service company's inventory balance typically represents expenses incurred for services rendered that have not yet been invoiced to customers (work in process). Expenses for sales and remuneration of administrative personnel are not included in the cost of services, but are recognized separately as expenses of the reporting period. The cost of inventories should not include the amount of expected profit, since it will be included in the invoice for services rendered and work performed.
The cost of inventories of products that are not generally fungible, as well as goods and services produced or provided and allocated to specific projects, is allocated based on specific individual cost determinations.
The weighted average cost is calculated based on the value of inventories at the beginning of the reporting period, as well as all units of inventory that were purchased (or produced) during the reporting period. Retail costing is used in the retail industry to value inventory of large numbers of frequently changing items with similar profit margins for which other costing methods are not feasible.
The value of inventory is determined by reducing the cost of sales of inventory using the appropriate gross profit percentage. The percentage used takes into account inventory that has been reduced in value below the original selling price. In many cases, the average percentage for each retail department is used.
In practice, a situation is possible when inventories are sold below their cost. The reasons for this may be:
General drop in market prices for goods;
Physical damage to goods;
Obsolescence;
Additional costs required to complete the manufacture of the product.
Each type of inventory should be considered separately to assess the reduction in inventory value to net realizable value. Typically, inventories are written down to net realizable value - for each type of inventory item. However, in some cases it may be necessary to group similar or related items. For example, when inventories belonging to the same product line and intended for the same purposes or end users are produced or sold in the same geographical region and practically cannot be priced separately from other items in the product line.
The cost of materials used in production is not reduced below the actual cost of acquisition if the finished product (in which they were used) is sold at a profit.
The following information is subject to disclosure in the financial statements:
Accounting policies approved for the valuation of reserves, including the formulas used for calculations;
The total book value of inventories and their book value by type of stock held by the organization;
The carrying amount of inventories stated at fair value less costs to sell;
The amount of inventory recognized as an expense during the reporting period;
The amount of decrease in the value of inventories recognized as an expense in the reporting period;
The amount of the recovered amount related to the amount of the previously made write-off of the cost of inventories recognized as an expense during the reporting period;
Circumstances or events that led to the restoration of the value of inventories;
The carrying amount of inventories used as collateral to secure obligations;
Information on the carrying value of various groups of inventories, and the degree to which changes in the value of these assets are significant for users of financial statements.
The generally accepted grouping of inventories represents the following groups: goods, inventories, materials, work in progress and finished goods.
The accounting procedure for inventories in accordance with International Financial Reporting Standards is established by IAS 2 Inventories.
IAS 2 Inventories provides for the procedure for determining the initial cost of inventories and their subsequent recognition as expenses, as well as the specifics of reflecting information about inventories in financial statements.
IFRS Inventories was introduced on the territory of the Russian Federation by Order of the Ministry of Finance dated December 28, 2015 No. 217n.
The concept of inventories according to IFRS
Inventories are assets that:
- or held for sale in the ordinary course of business;
- or are in the process of being manufactured for such sale;
- or are in the form of raw materials or materials that will be consumed in the process of production or provision of services.
For example, inventories include goods purchased for resale, including, for example, land and other property. Inventories also include finished goods or work in progress of an organization, including raw materials and materials intended for use in the production process.
IFRS: inventory valuation
Inventories under IFRS 2 are measured at the lower of:
- or cost;
- or clean possible price sales.
The cost of inventories includes all acquisition costs, conversion costs and other costs incurred to maintain the current location and condition of inventories.
Net realizable price is the estimated selling price in the ordinary course of business less the estimated costs to complete production and the estimated costs to be incurred to sell.
The inventory write-off assessment can be made using one of 3 methods:
- at the cost of each unit;
- using the FIFO method;
- using the weighted average cost method.
The unit cost method should be applied to inventories that are not generally fungible and to goods or services produced and allocated to specific projects.
For other inventories (for all inventories that have similar properties and patterns of use), the organization uses one of the methods: the first in, first out (FIFO) method or the weighted average cost method.
Recognition of inventories as expenses
When inventories are sold, their carrying amount is recognized as an expense in the period in which the related revenue is recognized.
When inventory is written down to net realizable value or inventory losses are recorded, such write-downs and losses are recognized as an expense in the period in which the write-down or loss occurs.
If the net realizable price of inventories increases, the amount of the reversal of a previous write-down of inventories is recognized as a decrease in the amount of inventories recognized as an expense in the period in which the reversal occurs.
In some cases, inventory may be allocated to other asset accounts, such as inventory used as a component of internally generated property, plant and equipment. Inventories allocated to other assets in the case of are recognized as expenses over the useful life of the corresponding asset.
Disclosure of reserves
An entity's financial statements must disclose the following information about inventories:
- the accounting policies adopted for valuing inventories, including information about the costing formula used;
- the total book value of inventories and the book value of inventories by type used by the organization;
- the carrying amount of inventories measured at fair value less costs to sell;
- the amount of inventory recognized as an expense during the reporting period;
- the amount of any write-down of inventory recognized as an expense in the reporting period;
- the amount of any write-off reversal that was recognized as a decrease in inventories recognized as an expense in the reporting period;
- the circumstances or events that led to the reversal of the inventory write-down;
- the carrying amount of inventories pledged as security for obligations.