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| Old GAAP | FRS 102 | Further Comment On Differences |
| Stocks | Inventories (S.13) | |
| Stocks include goods purchased for resale, consumable stores, raw materials, work in progress, long-term contract balances and finished goods. | 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. Specifically excluded on the basis that they are dealt with in other sections: · work in progress under construction contracts (Section 23); · financial instruments (Section 11 and 12); · biological assets related to agricultural activity (Section 34); · agricultural produce at the point of harvest (Section 34). Long term contracts are within the scope of Section 23 – Revenue. | The main difference here is that long term contracts are now accounted for under the revenue standard (Section 23) of FRS 102, whereas it was considered within the inventory standard under old GAAP. See Section 23 for the differences with regard to long term contracts. Section 13 specifically scopes out biological assets and agricultural produces; old GAAP did not exclude these nor did it make specific reference to them. The differences mentioned above should have no real impact on transition other than Section 23 having to be referred to, when an entity deals in long term contracts. The differences between old and new GAAP has been discussed in Section 23. Section 34 should be referred to for the accounting treatment of biological assets and agricultural produce at the point of harvest where an entity holds such assets. The differences between old and new GAAP has been discussed in that section. |
| Net realisable value. | Estimated selling price less costs to complete and sell. There are no differences to old GAAP definition. | No difference to note. |
| FIFO and average weighted cost permitted. | FIFO and average weighted cost permitted. Specific reference to costing techniques: · standard costing, · latest purchase price: and · the retail method. | No differences expected on transition as a result of the more detailed guidance in Section 13 as this was applied in any event under old GAAP. Old GAAP did not allow the use of the latest purchase price when valuing inventory, FRS 102 does. Care needs to be applied when this method is adopted. |
| LIFO not permitted. | LIFO not permitted. | No differences. |
| SSAP 9 did not deal with non-exchange transactions, therefore it is more likely that these inventories would not have been valued. | Non-exchange transactions (e.g. a donation, free products) should be allocated a cost and this cost should equate to the fair value at the date of acquisition which was not the case under old GAAP (Section 13.5A). A transition adjustment may be required where material. | Where an entity has received inventory at no-charge, consideration will need to be given as to the inventories fair value at the date of transition as this would have been valued at nil under old GAAP. Where the fair value of all such inventory is above the materiality levels an adjustment will be required. The journals required would be to: Dr Inventory Cr Profit and loss reserves (net of deferred tax) Cr Deferred tax Being journal to recognise inventory not valued under old GAAP together with the related deferred tax. A journal will also be required in the comparative year such that the movement in this type of stock is shown in the profit and loss. The journal requirement would be: Dr inventory if inventory increases from opening balance sheet date (or Cr inventory if decreasing) Cr/Dr Cost of sales Being journal to recognise the movement in inventory. Dr/Cr Deferred tax liability Dr/Cr Deferred tax in P&L Being journal to recognise the deferred tax on the movement. The final deferred tax figure recognised (prior to the accounting period beginning after 1 January 2015) should be written off over a 5-year period under the tax transition rules. |
| Spare parts, service equipment and stand-by equipment are not specifically mentioned in SSAP 9 or FRS 15. Therefore, the treatment varies whereby spare parts etc. may be classified as either inventories or property, plant and equipment. | Although not dealt with in Section 13, Section 17 which deals with property, plant and equipment (PPE) provides specific reference to the classification of spare parts (including stand-by equipment and servicing equipment). Spare parts are classified as property plant and equipment when they are expected to be used during more than one period or only used in connection with an item of property, plant and equipment (e.g. standby equipment). This may require an adjustment on transition, if previously under old GAAP, these were included within inventory. | Where an entity has previously classified spare parts, standby equipment or servicing equipment as inventory, an adjustment will be required to reclassify this to PPE on transition to FRS 102. Depreciation will also be required to be charged going forward. For the comparative year a deferred tax adjustment may be required as the depreciation in that period may be allowed in future tax computations under the transition arrangements. See worked example attached which provides the journals required on transition to FRS 102 (Example 38 – Reclassification Of Spare Parts From Inventory To PPE). |
| Inventories held for distribution are not specifically dealt with and in practice these were most likely expensed as incurred. | Inventories held for distribution at no consideration or for a nominal consideration i.e. advertising, promotional leaflets etc. should be measured at cost adjusted where applicable for loss of service potential (Section 14.4A). Under Section 13, these items should be shown as an asset on the balance sheet within inventory where it can be shown they will create future economic benefits, hence, may if material, create differences on transition. | Where advertising and promotional inventory is material to the entity a transition adjustment will be required to reinstate this inventory onto the balance sheet at the date of transition. The journals required on transition would be to: Dr Inventory Cr Profit and loss reserves net of deferred tax Cr Deferred tax liability Being journal to recognise inventories held for distribution and the related deferred tax effect. A journal will also be required in the comparative year such that the movement of this type of stock is shown in the profit and loss. The journal requirement would be to: Dr inventory if inventory increases from opening balance sheet date or Cr Inventory if not Cr/Dr Cost of sales Being journal to recognise inventory. Cr/Dr Deferred tax liability Dr/Cr Deferred tax in P&L The final deferred tax figure recognised (prior to the accounting period beginning after 1 January 2015) should be written off over a 5-year period in line with the transition rules. |
| No mention of accounting for deferred payments. | Inventories purchased on deferred payment terms are deemed to contain a financing element (Section 13.7). The finance element is essentially the difference between what the cost would be if the company paid for this under normal credit terms as opposed to the additional price included for extended credit terms. Where this cannot be determined then a market rate of interest would be charged i.e. a rate a third party (e.g. a bank) would charge for the extended credit. The difference representing interest is charged to the income statement over the term of the financing unless it specifically comes within the scope of Section 25 – Borrowing costs. | Old GAAP did not cater for such an instance, so, where purchases of stock is carried out on such terms and the gross amount was capitalised in inventory, an adjustment will need to be made on transition to exclude the interest cost as the finance element will have to be excluded from the cost. See attached a worked example of how the financing element is calculated where the cash price cannot easily be determined (Example 39 – Purchase With Unusual Credit Terms). |
| No explicit guidance in this area, however in reality the treatment is similar to FRS 102. | Inclusion of dismantling, removing and restoration costs is required to be included in production overheads and absorbed into inventory. It is unlikely to create major differences on transition as this was likely included in production overheads in the past under old GAAP. | No differences expected in this area, as it is likely that this treatment was adopted under old GAAP. |
| Selling costs allowed to be included in the cost of inventories or services supplied to a customer specification. | Selling costs specifically excluded from the cost of inventories. | On transition a check should be performed to ensure such selling costs are excluded where an entity provides goods to customer specification. Where these have been capitalised a transition adjustment will be required to expense these costs where material. |
| No disclosures of impairment losses recognised in profit and loss for the period. | Similar disclosures required to old GAAP but in addition FRS 102 requires entities to disclose impairment losses recognised or reversed in profit and loss for the period. | Entities will need to disclose the movement in impairment provisions posted to the profit and loss. This can be disclosed under the inventory note or in the operating profit note. |
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