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Derecognition as an asset
Extract from FRS 102 – Section 13.20-13.21
13.20 When inventories are sold, the entity shall recognise the carrying amount of those inventories as an expense in the period in which the related revenue is recognised.
13.20 A When inventories held for distribution at no or nominal consideration are distributed, the carrying amount of those inventories shall be recognised as an expense.
13.21 Some inventories may be allocated to other asset accounts, for example, inventory used as a component of self-constructed property, plant or equipment. Inventories allocated to another asset in this way are accounted for subsequently in accordance with the section of this FRS relevant to that type of asset.
OmniPro comment
Section 23, the revenue standard is the key basis for when inventory is derecognised. Usually for goods type sales, revenue is recognised when the risks and rewards of ownership pass to the purchaser which is usually when it is delivered to the customer or it can be based on legal title driven by shipping terms. Once the risks and rewards transfer, a sale is recognised and at the same time the inventory is derecognised.
Where a company holds consignment stock, this stock is not recognised by the purchaser as the risks and rewards of ownership do not pass until the goods are used by the purchaser. Therefore by definition any sale on a consignment stock basis cannot be recognised by the seller and as the sale cannot be recognised, then the inventory is not derecognised from the sellers balance sheet.
Example 9: Derecognition of inventory
Company A delivered consignment stock to Company B’s premises. Company B uses this stock in the production process. Title does not transfer until Company B takes the stock from the warehouse. Company A could not recognise a sale on the transfer as the risk and rewards of ownership has not passed to Company B. Therefore Company A could not derecognise this inventory. Only when Company B takes some of the inventory from the consignment stock and once Company A is informed of this can revenue be recognised by Company A and therefore inventory can be derecognised by Company A and recognised as inventory by Company B.
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