AUSTRALIAN NOT FOR PROFIT NETWORK INC ED 116 sub 9 ABN 23 955 064 152 104 Auburn Road Hawthorn Victoria 3122 Telephone: 03 9818 8166 Fax: 03 9818 8144 __________________________________________________________ ____ 30 September 2003 The Chairman Australian Accounting Standards Board PO Box 204 Collins St West Vic 8007 Dear Chairman Convergence Comments on ED 116 - Inventories The members of the Australian comprise accounting firms throughout Australia who specialise in the not for profit sector. Between them they employ approximately over 50 qualified accountants who are engaged in providing professional advice and auditing services to over 600 charitable, religious and nonprofit associations in Australia. Members of the network are actively involved in the reform of statutory regulation, accounting standards and governance in the not for profit sector. We express our appreciation to your Board for taking the extra time and effort to highlight proposed changes to Australian accounting standards which might result following the release of the current Convergence exposure drafts. The shading of relevant paragraphs has been of great assistance to us in our evaluation of the exposure drafts thus far. We enclose our comments on Exposure Draft 116 and hope they may be useful in your deliberations. Yours faithfully Kimberly Smith Chairman Exposure Draft ED 116 Request for Comment on IAS 2 and IPSAS 12 AASB 102 INVENTORIES ______________________________________________________________________ Specific Matters for Comment Specific matters upon which the Board has invited comments in relation to ED 116: (a) whether the proposed requirements for including additional material applicable to not- for-profit entities are appropriate and workable; Response: Yes, we support the inclusion of the proposed additional material and consider them to be both appropriate and workable. (b) whether any of the features of AASB 1019 identified as different from IAS 2 in the comparison in this Preface should be included in the proposed Australian equivalent of IAS 2, and if so, which features; Response: Yes, we support the inclusion of the proposed additional material and consider them to be both appropriate and workable. support the view that the additional guidance provided by AASB 1019 on the other matters raised in the Preface should be retained. If such inclusions are unacceptable to the IASB, then we would like to see the AASB provide guidance notes to IAS 2. (c) any regulatory issues or other issues arising in the Australian environment that may affect the implementation of the proposals, particularly any issues relating to: (i) not-for-profit entities; (ii) public sector entities; Response: No comment. We are not aware of any such regulatory issues. (d) whether the proposals are in the best interests of the Australian economy; and Response: No comment. (e) whether the proposed format of the “new” series of Australian Standards is appropriate and workable. Response: The proposed AASB 102 appears to be appropriate and workable in relation to the not-for-profit sector. The additional guidance provided by AASB 1019 would enhance and assist the preparers of NFP financial reports. Australian Not for Profit Network Inc. DETAILED RESPONSES NFP1 – Scope In respect of not-for-profit entities, this standard does not apply to work in progress of services to be provided for no or nominal consideration directly in return from the recipients. NFP2 – Definition Not-for-profit entity is an entity whose principal objective is not the generation of profit. A not-for-profit entity can be a single entity or a group of entities comprising the parent entity and each of the entities that it controls. NFP3 – Definition In respect of not-for-profit entities, current replacement cost is the cost the entity would incur to acquire the asset on the reporting date. NFP4 – Definition In respect of not-for-profit entities, inventories held for distribution are assets: (a) held for distribution at no or nominal consideration in the ordinary course of operations; (b) in the process of production for distribution at no or nominal consideration in the ordinary course of operations; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services at no or nominal consideration. NFP5 In respect of not-for-profit entities, inventories held for distribution shall be measured at the lower of cost and current replacement cost. Response: We support the addition of this paragraph, although we note that ‘net realisable value’ could be a realistic measurement for goods held by charity “opportunity shops”. However, our enquiries indicate that – (a) most opportunity shops operated by churches and community groups do not report the value of their inventories in their financial reports; (b) a few large charity retail outlets use net realisable value in their financial reporting. NFP6 A not-for-profit entity may hold inventories whose future economic benefits or service potential are not directly related to their ability to generate net cash inflows. These types of inventories may arise when a government has determined to distribute certain goods at no charge or for a nominal amount. In these cases, the future economic benefits or service potential of the inventory for financial reporting purposes is reflected by the amount the entity would need to pay to acquire the economic benefits or service potential if this was necessary to achieve the objectives of the entity. Where the Australian Not for Profit Network Inc. economic benefits or service potential cannot be acquired in the market, an estimate of replacement cost will need to be made. If the purpose for which the inventory is held changes, then the inventory is valued using the provisions of paragraph 6. Examples of inventories held for distribution include strategic stockpiles of various reserves, such as energy reserves (for example, oil) for use in emergency or other situations (for example, natural disasters or other civil defence emergencies). These stockpiles are recognised as inventories for the purposes of this Standard and treated accordingly. Response: We support the addition of this paragraph. It will be particularly helpful for large welfare and overseas aid agencies. NFP7 For inventories held for distribution by not-for-profit entities, the carrying amount shall be recognised as an expense when the goods are distributed or when the services are rendered. The amount of any write-down of inventories 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 shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. Response: We support the addition of this paragraph. Kimberly Smith FCA Australian Not for Profit Network Inc. Australian Not for Profit Network Inc. The Australian Not for Profit Network is a network of seven accounting firms which specialise in the area of not for profit accounting. Between them they provide professional advice and auditing services to more charitable, religious and nonprofit associations than any other group of accountants in Australia. Members of the network are actively involved in the reform of statutory regulation, accounting standards and governance in the not for profit sector. National Office Australian Not for Profit Network Inc. 104 Auburn Road, Hawthorn Victoria 3122 email: firstname.lastname@example.org Australian Not for Profit Network Inc.