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Impairment of inventories
Extract from FRS102: Section 27.2 – 27.4
Selling price less costs to complete and sell
27.2 An entity shall assess at each reporting date whether any inventories are impaired. The entity shall make the assessment by comparing the carrying amount of each item of inventory (or group of similar items – see paragraph 27.3) with its selling price less costs to complete and sell. If an item of inventory (or group of similar items) is impaired, the entity shall reduce the carrying amount of the inventory (or the group) to its selling price less costs to complete and sell. That reduction is an impairment loss and it is recognised immediately in profit or loss.
27.3 If it is impracticable to determine the selling price less costs to complete and sell for inventories item by item, the entity may group items of inventory relating to the same product line that have similar purposes or end uses and are produced and marketed in the same geographical area for the purpose of assessing impairment.
Reversal of impairment
27.4 An entity shall make a new assessment of selling price less costs to complete and sell at each subsequent reporting date. When the circumstances that previously caused inventories to be impaired no longer exist or when there is clear evidence of an increase in selling price less costs to complete and sell because of changed economic circumstances, the entity shall reverse the amount of the impairment (i.e. the reversal is limited to the amount of the original impairment loss) so that the new carrying amount is the lower of the cost and the revised selling price less costs to complete and sell.
OmniPro comment
The impairment of inventories has been discussed in Section 13. The key principal is that an assessment is carried out at each reporting date to assess whether there are indicators of impairment. If indicators are present, the entity should write the stock down to estimated selling price less cost to sell. Indicators of impairment would include:
- Aged stock/slow moving inventory
- Excessive volumes of inventory
- Damaged stock
- Obsolescence of inventory due to changes in customer trends
- Plans to discontinue a product line.
Where circumstances which cause an impairment reverses, the inventory should be restated to its original cost or if lower the amount determined to be the recoverable amount.
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