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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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13.6 Cost measurement techniques
13.6.1 Extract from FRS 102 – Section 13.16-13.18
13.16 An entity may use techniques such as the standard cost method, the retail method or most recent purchase price for measuring the cost of inventories if the result approximates cost. Standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions. The retail method measures cost by reducing the sales value of the inventory by the appropriate percentage gross margin.
13.17 An entity shall measure the cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects by using specific identification of their individual costs.
13.18 An entity shall measure the cost of inventories, other than those dealt with in paragraph 13.17, by using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified. The last-in, first-out method (LIFO) is not permitted by this FRS.
13.6.2 OmniPro comment
13.6.2.1 Overview
Section 13.16 of FRS 102 permits the use of techniques such as the retail method, the standard cost method and the most recent purchase price if equates to approximate costs. For non-interchangeable goods these should be stated at purchase cost using cost formulas as per section 13.17 of FRS 102.
13.6.2.2 Retail method
The retail method takes the selling price of the stock and reduces this by the gross margin for the product which then equates to cost. It is used by retail units and similar industries where there is a high volume of line items where similar margins are made on the products e.g. a clothing retailer where similar margin is made on the clothes. This is a quick and easy way to measure inventory. It is determined by taking all stock on hand and allocating the sales value to this inventory and then applying a set margin based on product categories.
13.6.2.3 Standard costs
Standard costing is usually used by large manufacturing organisations. It is based on budgeted costs for the coming years. All raw material inventory is measured at the standard cost. Then fixed and variable production overheads are absorbed based on budgeted figures. Difference between the actual purchase cost and the standard cost are posted as variances in cost of sales. Where applied it must be reviewed regularly to ensure the standard cost equates to actual. Usually at year end to ensure the carrying value of stocks equates to the actual cost, entities will absorb purchase price and material usage variances into the inventory number at each month/year end.
The absorption of these variances would usually be based on the average stock turn. As with any costing techniques, care must to be taken to ensure there were no abnormal costs posted to the purchase price and the material usage variances as abnormal costs are not permitted to be absorbed.
13.6.2.4 Most recent purchase price
Section 13 allows the most recent purchase price which was not allowed under old GAAP. By its name it values stock based on the last purchase invoice. Where this costing method is used care needs to be exercised to ensure that the last purchase invoice was not unusually high and therefore does not represent the cost for the rest of the items in stock therefore overstating inventory at year end.
13.6.2.5 Cost formulas
13.6.2.5.1 Non-interchangeable goods
For non-interchangeable goods i.e. specific goods, and goods and services used for specific projects, these should be stated at the purchase cost. This type of formula is usually used for entities who prepare bespoke goods or services e.g. bespoke furniture, specific to customer circumstances. This method cannot be used where there is a large number of interchangeable items e.g. widgets and bolts.
13.6.2.5.2 Interchangeable goods
Where goods and services are interchangeable then they should use the first-in first-out basis (FIFO) or the weighted average basis as per section 13.18 of FRS 102. The FIFO basis uses the logic that the first stock item purchased and put into stock/used in production is the first one that is sold. The weighted average method on the other hand uses the average cost of the period for the same types of goods. This is the simplest formula to use.
13.6.2.5.3 Last in last out prohibited
Last-in last-out is not permitted under Section 13.18 of FRS 102.
13.6.2.5.4 Requirements for consistency
An entity should use the same cost formula for the same types of inventory. It must have applied this consistently. This is stated in section 13.18 of FRS 102.
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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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