Executive summary – Inventories (GRAP 12)

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					Executive summary – Inventories (GRAP 12)
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Inventories are those assets that an entity holds for sale or distribution in the ordinary course of its operations (e.g. medicines that a hospital either distributes to patients at a profit, or for free), materials and supplies used in an entity’s operations (e.g. spare parts that an entity keeps to maintain its fleet of cars), or work in progress (e.g. houses in the process of being constructed that will be given to low income families). The key principle behind inventories is that they are current (short-term) in nature, which means that they are usually realised, either by way of selling them, distributing them or using them in an entity’s activities, in the 12 months following the end of the financial year. Current assets such as biological assets, agricultural produce at the point of harvest, financial instruments, work in progress from construction contracts and work in progress of services to be provided at no or nominal consideration (i.e. as part of a non-exchange transaction) are not dealt with in GRAP 12. Other Standards of GRAP provide specific requirements for those items. In every reporting period, it is important to determine how much expenditure incurred during the year relates to assets that are only going to be sold or used in future periods and thus should be capitalised as an asset in the statement of financial position. Inventories acquired by an entity as part of an exchange transaction (i.e. the entity paid cash or provided other goods and services in exchange for the inventories) are recognised at cost. Cost generally refers to the purchase price, plus taxes, transport costs and any other costs in bringing the inventories to their current location and condition. Where entities manufacture, construct or produce inventories, the cost includes the cost of labour, materials and overheads used during the manufacturing process. Inventories acquired for no or nominal consideration, i.e. as part of a nonexchange transaction, are initially measured at fair value. After determining the cost of inventories, costs are assigned to inventories with a similar nature and use to the entity using an appropriate cost formula, i.e. either first in first out (FIFO), or the weighted average cost. The entity should determine at every reporting date whether or not the value of inventories recognised in the statement of financial position is appropriate. Entities should test whether or not inventories have declined in value by comparing the initial cost to the net realisable value, except for inventories to be distributed at no or nominal charge or consumed in the production process of goods to be distributed at no or nominal charge. The cost of these inventories should be compared to the current replacement cost rather than the net realisable value. The lower value is used to measure inventories at year end, and any difference is recognised in the statement of financial performance as a loss.
This executive summary and related questions have been prepared by the Secretariat of the Accounting Standards Board and have not been approved by the Board. While the summary highlights the key features of the Standard, it is not comprehensive. Readers should refer to the relevant Standard of Generally Recognised Accounting Practice (GRAP) for comprehensive requirements. Any examples provided are for illustrative purposes only and are not prescriptive.

An entity recognises inventories as an expense in the statement of financial performance when sold, distributed, used or exchanged.

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Executive summary GRAP 12

Frequently Asked Questions
1. What is inventory? Inventories are assets in the form of materials or supplies to be consumed in the production process, in the form of materials or supplies to be consumed or distributed in the rendering of services, held for sale or distribution in the ordinary course of operations, or in the process of production for sale or distribution. 2. What items of inventory are not dealt with in GRAP 12 and why? This Standard does not apply to the measurement of inventories held by: • producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value in accordance with well established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognised in surplus or deficit in the period of the change. commodity broker-traders who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in surplus or deficit in the period of the change.

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3.

What is the interaction between GRAP 12, 16 and 17 i.e. when is an item classified as property, plant and equipment, investment property, or inventory? • Assets are classified as inventory when an entity holds them for sale, use, or distribution in the ordinary course of its operations in the short-term (usually within the next 12 months). Assets are classified as investment property when they are held for capital appreciation or rented to others. Assets are classified as property, plant and equipment when they are owner occupied or used by an entity in its own operations over more than one year.

• • 4.

Does GRAP 12 only deal with inventories acquired and held as part of exchange transactions? No, GRAP 12 also deals with inventories acquired through non-exchange transactions (i.e. for no or a nominal consideration). It also deals with those inventories that are to be distributed for free or only a nominal fee.

5.

When should an entity recognise inventory? An entity recognises inventories only if it is probable that future economic benefits or service potential associated with the item will flow to the entity, and the entity can reliably measure the cost of the inventories.

6.

At what value should an entity initially recognise inventory? Entities should initially recognise inventory at cost. The cost of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Where an entity acquires inventories through non-exchange transactions (i.e. at no cost, or for a

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nominal consideration) the cost is determined by reference to the fair value of those inventories as at the date of acquisition. 7. What costs are not included in the cost of inventories? Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which an entity incurs them are: • • • • 8. abnormal amounts of wasted materials, labour, or other production costs; storage costs, unless those costs are necessary in the production process before a further production stage; administrative overheads that do not contribute to bringing inventories to their present location and condition; and selling costs.

If an entity produces or manufactures goods, can it use standard costing? Yes, entities may use standard costing as a technique for the measurement of the cost of inventories, if the result approximates cost. Standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity use. An entity regularly reviews and, if necessary, revises the standard costs in the light of current conditions.

9.

Can any cost formula be used? No, entities assign the cost of inventories by using the first-in, first-out (FIFO) or weighted average cost formula. An entity must use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with different nature or use (for example, certain commodities used in one segment and the same type of commodities used in another segment), different cost formulas may be justified. A difference in geographical location of inventories (and in the respective tax rules), by itself, is not sufficient to justify the use of different cost formulas. The last-in-first-out cost formula is prohibited.

10.

At what value does an entity carry its inventories after initial recognition? Entities must measure inventories at the lower of cost and net realisable value, except where they are held for: (a) (b) distribution at no charge or for a nominal charge, or consumption in the production process of goods to be distributed at no charge or for a nominal charge.

In these instances, an entity measures such inventories at the lower of cost and current replacement cost. 11. Should an entity assess the value of inventories at every reporting date? Yes, an entity must assess the value of inventories at every reporting date to determine whether the current replacement cost or net realisable value is lower than the carrying amount of the inventories and, therefore, writes down the value of inventory to net realisable value or current replacement cost.

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12.

Is the write-down of inventory similar to the impairment of other assets such as property, plant and equipment? Yes. The write down of inventory requires an entity to compare the carrying amount of inventory to its net realisable value or current replacement cost, while other assets are written down (impaired) by comparing an asset’s carrying value to its recoverable amount or recoverable service amount (which is calculated as the higher of value in use and fair value less costs to sell).

13.

When does an entity recognise inventory as an expense in the statement of financial performance? When inventories are sold, exchanged or distributed, an entity recognises the carrying amount of those inventories as an expense in the period in which the related revenue is recognised. If there is no related revenue, the expense is recognised when the goods are distributed, or related service is rendered. The amount of any write-down of inventories to net realisable value or current replacement cost, and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories arising from an increase in net realisable value or current replacement cost shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

14.

Are there any specific disclosures regarding inventory? Yes, it is required, amongst other things, that an entity disclose: • • • • its accounting policies adopted for measuring inventories, including the cost formula used (for example, FIFO or weighted average cost); the cost of inventory recognised as an expense in the period (if an entity presents its surplus and deficit account using a nature of expense format; the carrying amount of inventories carried at fair value less costs to sell; and the amount of any write-down of inventories to net realisable value or current replacement cost recognised as an expense in the period.

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Executive summary GRAP 12


				
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Description: Executive summary – Inventories (GRAP 12)