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Contents
13.1.1 Extract from FRS 102 – Section 13.1 – 13.3.
13.2 Measurement of inventory.
13.2.1 Extract from FRS 102 – Section 13.4-13.4A.
13.2.2.1 Inventory other than inventory held at or nominal consideration.
13.2.2.2 Inventory held at no or nominal consideration.
13.2.2.3 Definition of no or nominal consideration.
13.3.1 Extract from FRS 102 – Section 13.5-13.7.
13.3.2.1.1. Irrevocable taxes and taxes incurred only an extraction from warehouses.
13.3.2.2 Stock purchased on beyond normal credit terms.
13.3.2.4 Non-exchange transaction.
13.4 Cost of conversion – production overheads.
13.4.1 Extract from FRS 102 – Section 13.8-13.11 and 13.14-13.15.
13.4.2.1 Cost to be recognised in inventory – production overheads.
13.4.2.1.2 Illustration of allocation of overheads to production – normal capacity.
13.4.2.2 Joint products and by-products.
13.5 Cost excluded from inventories.
13.5.1 Extract from FRS 102 – Section 13.13.
13.5.2.5 General and administrative overheads.
13.6 Cost measurement techniques.
13.6.1 Extract from FRS 102 – Section 13.16-13.18.
13.6.2.4 Most recent purchase price.
13.6.2.5.1 Non-interchangeable goods.
13.6.2.5.2 Interchangeable goods.
13.6.2.5.4 Requirements for consistency.
13.7 Impairment of inventories.
13.7.1 Extract from FRS 102 – Section 13.19.
13.7.2.2 Assessing the selling price less cost to sell
13.7.2.3 Post period end events and impairments.
13.7.2.4 Reversal of impairments.
13.8 Derecognition as an asset
13.8.1 Extract from FRS 102 – Section 13.20-13.21.
13.9.1 Extract from FRS 102 – Section 13.22.
13.9.2.3 Notes to the financial statement.
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13.7 Impairment of inventories
13.7.1 Extract from FRS 102 – Section 13.19
13.19 Paragraphs 27.2 to 27.4 require an entity to assess at the end of each reporting period whether any inventories are impaired, ie the carrying amount is not fully recoverable (e.g. because of damage, obsolescence or declining selling prices). If an item (or group of items) of inventory is impaired, those paragraphs require the entity to measure the inventory at its selling price less costs to complete and sell, and to recognise an impairment loss. Those paragraphs also require a reversal of a prior impairment in some circumstances.
13.7.2 OmniPro comment
13.7.2.1 Overview
Inventories should be reviewed for impairment under section 27.2 to 27.4 of FRS102 at the end of each reporting period as stated in section 13.19 of FRS 102. Indicators of impairment are:
- Aged stock
- High levels of stock
- Damaged stock
- Obsolete stock
- Change in markets such that the selling price is decreasing
- Loss recognised in the year, indicating too high of overheads
Where an impairment is identified the cost should be written down to the selling price less cost to complete and sell as stated in section 13.19 of FRS 102. When assessing the selling price less cost to complete and sell, it should ideally be done on an individual level. However it is acceptable to do as a group where the inventories are similar in nature or relate to the same product. The impairment should be posted to cost of sales in the profit and loss.
Example 5: Impairments
Company A has inventory of CU100,000 at the year-end. In second month following year end it emerged that the market for the product slumped and as a result the selling price decreased significantly. At the time of preparing the financial statements on 1 February the entity should use the post year end selling price as a basis for assessing impairments. The company has a stock turn of 2 months. Given that the decline in the market has indicated an impairment, an impairment will be required to be booked in the year end accounts. The value of the impairment should equal the selling price after year end less the cost to sell and complete. Given that in the first month after year end there was no issues, CU50,000 of the inventory would not have to be written down as it was sold above cost (CU50,000 as there is two months of stock on hand at year end) however the remaining CU50,000 will have to be impaired as this will be sold at the new lower price.
If we take this example and assume the selling price decreased in the second month of the year as above, but half way through that month it emerged that there was no longer a market for the product due to a new version being introduced. Therefore at the year-end, a provision would be made in full for the last part of the second month assuming there was no scrap value.
13.7.2.2 Assessing the selling price less cost to sell
When assessing selling price less costs to sell, it should be done on a specific entity basis and be based on what the entity can sell these for. So where there are sales contracts in place then the selling price determined in those contracts should be considered regardless of the outside market.
Although FRS 102 does not specifically deal with issues where the raw material cost is below cost but the finished good in which the raw material is used can be sold in excess of its stated cost (which would include the raw material element). Old GAAP and IFRS made it clear that where this occurred no impairment is required to be booked in the financial statements. The same stance should be taken with FRS 102.
Example 6: Raw material less than cost but finished good not
Company A produces cattle feed. The company uses a number of raw materials to produce this, one of these being barley. At the year end the purchase cost of barley per tonne was CU10 in excess of its recoverable amount (selling price less cost to sell). However, the cattle meal which incorporates this barley cost is selling well in excess of the total cost to produce the finished good. On this basis no provision is required to be booked.
Example 7: Post balance sheet events and requirement for impairment
Company A holds stock of CU500,000 at year end. Subsequent to the year-end there was a fire in the factory premises which destroyed the entire inventory. Although this means the CU500,000 stock is no longer saleable, this is seen as a non-adjusting post balance sheet event as the condition did not exist at the year-end date. This is made clear in Section 32.5 (b) Events after the reporting period.
13.7.2.3 Post period end events and impairments
When assessing whether a post year end event should trigger impairment at the year-end consideration needs to be given as to whether the condition which impacted the impairment was known at or before the year end or whether it became known after the year end. This point was illustrated at 13.7.2.2 and the example below.
Example 8: Post balance sheet events and requirement for impairment
A company has inventory of product X at year end worth CU500,000. Subsequent to year end the company made a decision to cease production of product X and instead sell a new updated product which is better than product X and does the same job. This has resulted in the full CU500,000 being irrecoverable. An assessment has to be made as to whether an impairment is required. In deciding whether a write down is required, one would have to assess if the company knew at year end that this change was going to happen even though it was not announced formally or if this decision was made post year end. If it was known pre year end, then an impairment is required to be booked.
13.7.2.4 Reversal of impairments
Under Section 27-Impairment of Assets, impairment can be reversed once the conditions that caused the impairment has reversed or the market conditions have improved such that the selling price increased. A reversal of impairment cannot result in the asset increasing higher than its original cost.
The reversal is posted to cost of sales in the profit and loss.
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Examples
Example 2: Inventories held for distribution.
Example 3: Cost of inventory – rebates.
Example 3A: Purchase with unusual credit terms.
Example 3B: Non-exchange transaction.
Example 4: Allocation of overheads to production with overheads higher than normal:
Example 6: Raw material less than cost but finished good not
Example 7: Post balance sheet events and requirement for impairment
Example 8: Post balance sheet events and requirement for impairment
Example 9: Derecognition of inventory.
Example 10: Extract from an accounting policy note and required inventory disclosures.
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