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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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The below extracts and guidance is applicable for periods beginning before 1 January 2019 and are based on the September 2015 version of FRS 102. For periods beginning on or after 1 January 2019, the March 2018 version of FRS 102 applies which incorporates the changes made by the Triennial review of FRS 102. Note the March 2018 version of FRS 102 can be voluntarily applies for periods beginning before 1 January 2019. For the extracts from the March 2018 version of FRS 102 and the related guidance please click on the following link. For details of a summary of the main changes as a result of the triennial review please see the following link.
13.1 Scope and definition
13.1.1 Extract from FRS 102 – Section 13.1 – 13.3
13.1 Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
13.2 This section applies to all inventories, except:
(a) work in progress arising under construction contracts, including directly related service contracts (see Section 23 Revenue);
(b) financial instruments (see Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues); and
(c) biological assets related to agricultural activity and agricultural produce at the point of harvest (see Section 34 Specialised Activities).
13.3 Other than the disclosure requirements in paragraph 13.22, this section does not apply to the measurement of inventories at fair value less costs to sell through profit or loss at each reporting date. Inventories shall not be measured at fair value less costs to sell unless it is a more relevant measure of the entity’s performance because the entity operates in an active market where sale can be achieved at published prices, and inventory is a store of readily realisable value.
13.1.2 OmniPro comment
13.1.2.0 Scope
The accounting for construction contracts is not within the scope of section 13 as stated in section 13.2 of FRS 102. For the accounting requirements for construction contracts (see 23.9.2)
Other items beyond the scope of section 13 of FRS 102 are:
– accounting for biological assets. (see section 34 of FRS 102)
– accounting for financial instruments (dealt with by section 11 and section 12 of FRS 102)
– inventories held at fair value less cost to sell at each reporting date (other than the disclosure in section 13.22 of FRS 102) as stated in section 13.3 of FRS 102
Fair value less cost to sell option
Section 13.3 of FRS 102 does not permit the fair value less cost to sell option for inventory unless:
– it is a more relevant measure for assessing the entity’s performance because the entity operates
– in an active market where the sale can be achieved at published prices; AND
– Inventory is a store of readily realisable value
13.1.2.1 Overview
Section 13 considers what should be included within the cost of inventories, how inventories should be measured, the methods to be used to determine cost and any disclosure requirements.
13.1.2.1.1 Inventory defined
Based on the definition in section 13.1 of FRS 102, inventory includes all types of goods purchased and held for resale including merchandise purchased by retailers. It encompasses finished goods (including any directly related manufacturing or labour costs), work in progress, materials and supplies awaiting use in production. Section 13.1(c) of FRS 102 includes In the definition of inventory assets in the form of materials or supplies to be consumed in the production process or in the rendering of services. This would include spare parts which are used within the same accounting period. If they are not used within the same accounting period then they should be accounted for as property, plant and equipment.
In relation to section 13.1 (a) of FRS 102, the important thing is that you consider whether the asset is held in the ordinary course of business. For example, if a construction company purchased land or property and the business of the company is to develop this, this is treated as inventories and not investment properties/property, plant and equipment. However, in a manufacturing company that purchased property then this would not be classified as inventory as it is not part of its normal course of business.
13.1.2.2 Spare parts
Section 17.5 of FRS 102 which is the standard that deals with property, plant and equipment makes it clear that -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. Where this is the case the spare part is depreciated over its useful life which cannot be more than the useful life of the main asset for which the spare parts are utilised. Therefore, care needs to be had to ensure spare parts which are going to be used during more than one period should be classified as PPE as opposed to inventory.
Example 1: Spare parts
A manufacturing company holds a significant stock of critical spare parts for its production equipment. Given that these spare parts are specific to the production equipment itself, and given that they will be used over more than one period, these assets are classified as PPE and depreciated over there expected useful life. In reality on transition the value if previously included in inventory should equal the cost to be transferred to PPE. A similar example would be where plastic boxes are used for carrying and distributing the main products which are used again and again and are not provided to customers on a long term basis. These are classified as fixed assets as opposed to spare parts.
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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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