pwc inventories . 2 pwc overview of session 1. scope of application and key concepts 3. disclosures...
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Inventories
http://www.cc.cec/budg/
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Overview of session
1. Scope of application and key concepts
3. Disclosures
5. Questions
4. E.C. specific implications
2. Recognition and measurement
Inventories
1. Scope of application and key concepts
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Definition
Inventories are assets:
• held for sale in the ordinary course of business; or
• 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
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Inventories
Inventories include:• goods: commodities purchased and held for resale
• supplies: raw materials
• products: intermediate products, finished goods
Raw Materials Work in Progress Finished Goods
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Out of scope
Not held for sale of for use in the production cycle:
• Office supplies – expensed
• Fixed assets– durable use for own activities
• E.g. Most spare parts and servicing equipment are usually carried as inventory and recognised as an expense as consumed. However, major spare
parts and stand-by equipment qualify as property, plant and equipment when the enterprise expects to use them during more than one period or if they
can be used only in connection with an item of property, plant and equipment and their use is expected to be irregular.
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IPSAS 12
Covers all inventories other than:
• WIP under construction contracts
• Financial instruments
• Agricultural and forest products, mineral ores and biological assets
Inventories
2. Recognition and measurement
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Inventories – Initial recognition• Initial recognition shall normally take place at the date of acquisition or date of entry
shall correspond to the date on which the ownership of the inventories is transferred to
the E.C., which generally corresponds to when delivery of the goods is accepted.
– For simplification purposes this may during the year be when the invoice is received
• Cut-off and reporting at year-end:
– If booking based on invoice, regularise any discrepancies between invoicing and
delivery/transfer of ownership
– Investigate specific contractual provisions determining title (e.g. FOB terms:
shipping or destination)
– Consignment inventories (held by custodians)
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Costs to be included
Cost of Purchase
OtherCosts
Cost of Conversion
includes:
- rebates
- tax (customs/VAT)
- transport
- handling costs attributable to the acquisition
Direct costs, e.g.
direct labour
Fixed & variable production overheads
Any other costs that are incurred in
bringing the inventories to their
present location and condition
All costs contributing to bring inventories to their present location and condition
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Costs to be excluded
• Abnormal amounts of wasted materials, labour or other production costs
• Storage costs
– Unless those costs are necessary in the production process prior
to a further production stage
• Administrative overheads that do not contribute to bringing inventories to their present location and condition
• Selling costs
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Cost Formulas
• Specific identification:
– for items that are not ordinarily interchangeable and goods or services
produced and segregated for specific projects
• Global methods
– First in First Out (FIFO) formula: assumes that the items of inventory
that were purchased or produced first are sold first
– Weighted Average Cost (WAC) formula: the cost of each item is
determined from the weighted average of the cost of similar items at
the beginning of a period and the cost of similar items purchased or
produced during the period
• Consistency required across each type of inventory
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Worked example – Inventory costing
Inventory: + during year N Inventory: - during year n
Date Q and (P) Cost Date Q Amount
Beginning
inventory
100 units (320) 32,000
March 1 250 units (341) 85,250 April 1 (230) ?
July 1 200 units (343) 68,600 September 1 (120) ?
October 1 100 units (346) 34,600 November 1 (100) ?
December 1 50 units (347) 17,350
Total in 600 units 205,800
Total 700 units 237,800 (450) ?
Closing inventory: 250 units
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Inventory costing - FIFO
Inventory: + during year N Inventory: - during year n
Date Q and (P) Cost Date Q Amount
Beginning
inventory
100 units (320) 32,000
March 1 250 units (341) 85,250 April 1 (230) 100*(320)+130
*(341)
July 1 200 units (343) 68,600 September 1 (120) 120*(341)
October 1 100 units (346) 34,600 November 1 (100) 100*(343)
December 1 50 units (347) 17,350
Total in 600 units 205,800
Total 700 units 237,800 (450) 151,550
Closing inventory: 250 units = 86,250
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Inventory costing - WAC
Date Movements Inventories
Q Cost/unit Value Q Cost/unit Value
January 1 100 320 32,000 100 320 32,000
March 1 250 341 85,250 350 335 = 117,250/350 117,250
April 1 (230) 335 (77,050) 120 335 40,200
July 1 200 343 68,600 320 340 = 108,800/320 108,800
September 1 (120) 340 (40,800) 200 340 68,000
October 1 100 346 34,600 300 342 = 102,600/300 102,600
November 1 (100) 342 (34,200) 200 342 68,400
December 1 50 347 17,350 250 343 = 85,750/250 85,750
Total out: 450 units 152,050 Closing inventory: 85,750
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The debits and credits
• Inventory is a current asset
• Inventory is expensed……when the related revenue is recognised
What are the Dr and Cr involved in a purchase of inventory?
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Two methods of accounting
• Stock ledgers – each movement in or out is accounted for individually; the level of inventories is known at each precise moment in time
• Periodic stock counts – inventories get adjusted based on periodic counts of physical inventory
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Stock ledgers
Using the FIFO method # ins #Dt : 6# Purchases of goods (economic outturn account) : 205 800
Ct : 4# Suppliers 205 800 Dt : 3# Inventories (balance sheet) 205 800
Ct : 6# Movement in inventories (economic outturn account) 205 800 # payment of suppliers #Dt : 4 Suppliers 205 800
Ct : 5# Cash 205 800 # outs #Dt : 6# Movement in inventories (economic outturn account) 151 550
Ct : 3# Inventories (balance sheet) 151 550
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Periodic stock counts
Throughout the year :
# ins #Dt : 6# Purchase of goods (economic outturn account) : 205 800
Ct : 4# Suppliers 205 800 # payment of suppliers #Dt : 4# Suppliers 205 800
Ct : 5# Cash 205 800 At year end :
# reversal of beginning balance #Dt : 6# Movement in inventories (economic outturn account) 32 000
Ct : 3# Inventories (balance sheet) 32 000 # recording of final balance #Dt : 3# Inventories (balance sheet) 86 250
Ct : 6# Movement in inventories (economic outturn account) 86 250
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Inventories – Subsequent measurement
• Cost may not be recoverable when:– damaged
– obsolete
– increased costs of completion
– selling price is reduced
Measure inventories at lower of:
Cost and Net Realisable Value
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Net Realisable Value
Selling price X
Trade discounts (X)
Costs to completion (X)
Marketing, selling and distribution costs (X)
Net realisable value X
Net Realisable Value
The estimated selling price in the ordinary course of
business less the estimated costs of completion and
estimated costs necessary to make the sale
Use replacement cost when the economic benefitsOr service potential cannot be acquired in the market
Inventories
3. Disclosures
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Key disclosures
• Accounting policies (including cost formula used)
• Balance sheet
– Carrying amount of inventories (on face of BS)
– Analyse inventories by classification (e.g. raw materials, finished
goods etc…)
• Economic outturn account
– Cost of inventories expensed in period
• Other
Inventories
4. E.C. specific implications
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Current accounting V. IPSASCompliance issue Current accounting policy Revised accounting policy
Nature and definition of inventory items Held for sale or for internal use Differentiate between inventories, fixed
assets and expenses
Office supplies
Other consumables
Material for building maintenance
Scientific material
Publications
Inventories Expenses
Expenses
Inventories
Inventories
Inventories
EAGGF inventories Do not belong to the E.C.
Pricing at year end Latest purchase price, except:
Publications (1/3 of sales price)
Fissile matters (cost of acquisition)
FIFO
NRV:
Goods for sale
Goods to be distributed for free
Lower of cost or market Lower of cost or NRV
Lower of cost or replacement cost
Inventories
5. Questions
http://www.cc.cec/budg/