Tuesday, November 24, 2020

CONTENT
OBJECTIVE & SCOPE

INVENTORIES MEASURMENT

EXPENSE RECOGNITION
IPSAS-12
DISCLOSURE

ACTIVITY

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IPSAS 12 - Objective and Scope IPSAS 12 - Definitions

 Objective is to prescribe the accounting treatment for Inventories are assets:
inventories.
(a) Consumed or distributed in the rendering of
 Primary issue is about what costs are recognized as
inventory costs and when these costs are services,
transferred to the St. of financial performance, including (b) Consumed in the production process,
any write-down to NRV. (c) Held for sale or distribution, in the ordinary
course of business
 Scope: (d) In the process of production for sale or
distribution

Ex: Fuel, Rations, Maintenance materials, spare

3 parts & accessories, merchandise inventories,4
WIP,…

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Initial Measurement of Inventories

IPSAS 12 – Definitions …
Measurement basis of Inventories
1) Cost basis: Purchase, conversion and other costs allowed The cost of inventories includes:
a) purchase cost or fair value if donated
2) Current replacement cost: Cost the entity would
incur to acquire the asset on the reporting date. in-kind;
b) conversion costs (materials, labour and
3) Net realizable value: Estimated selling price in the
ordinary course of operations, less estimated costs of overhead);
completion and estimated costs necessary to make the sale, c) all other costs incurred in bringing the
exchange, or distribution.
4) Fair value: Amount for which the same inventory
inventories to their present location and
could be exchanged between knowledgeable and willing condition
buyers and sellers in the marketplace.
5) Non-exchange transactions: transactions that
are not exchange transactions.
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IPSAS 12: Initial Measurement IPSAS 12 - Measurement

 Conversion costs
- Direct labor, indirect variable & fixed
production overhead costs

- Variable production overhead: allocate to

inventory based on actual usage

- Fixed production overhead: allocate to

production based on normal operating
capacity (except when abnormally high production)
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IPSAS 12 - Measurement
 Joint products
- Allocate b/n products on a rational
basis such as relative sales value of
products when they become separable
- If minor in value, do not allocate: measure
by-product at NRV and deduct this
amount from main product costs
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IPSAS 12 - Measurement
Costs Excluded:
 Costs of abnormal waste
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 Storage or warehousing costs unless
necessary for next stage of production
 Admin overheads not associated
with production
 Selling costs
 Financing charges above purchase price
for normal credit terms
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IPSAS 12 - Measurement
 Other inventorable costs
limited to costs to bring the inventories to
their intended location and condition
example:
- amortization of capitalized Dev't costs
related to inventory
- borrowing costs (IPSAS 5) included if for a
qualifying inventory item
Example: Initial cost determination
 UNICEF purchased corn flour for a price of $800,000. A
volume rebate of 1% applied to the purchase. The product
was transported FOB destination to a facility for additional
processing. Transportation and handling costs amounted to
$10,000. The flour was then fortified with Vitamin A and iron.
Production costs totaling $80,000 were incurred. The flour
was bagged and crated for delivery to a warehouse in RSS.
Additional transportation and handling costs totaling $25,000

were incurred. On arrival in Port X, import duties were
waived but taxes in the amount of $7,000 were levied.
UNICEF is entitled to a full rebate of local taxes paid.
Warehouse storage costs amounting to $5,000 were
incurred before the flour was turned over to a local NGO
for distribution to recipients.
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IPSAS 12 - Measurement IPSAS 12 - Measurement

 Cost formulas permitted should: Specific identification:

- Assign recent costs to ending inventory
- Correspond closely with the actual physical  For inventory items that are not ordinarily
flow of the goods and services interchangeable

- 3 Methods:  For goods and services produced and segregated

- Specific identification for specific projects
- First-in, first-out, and
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- Weighted average 13

IPSAS 12 - Measurement IPSAS 12 – Subsequent Measurement

 Inventories are measured at the lower of cost and net
realizable value (LCNRV), except where inventories
FIFO and weighted average: are acquired through a non-exchange transaction,
 FIFO – cost of latest purchases ends up in cost of where their cost shall be measured at their FV as at
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ending inventory, cost of earliest purchases are in the date of acquisition :

cost of goods sold
 Inventories shall be measured at the lower of
 Weighted average – weighted average cost of all cost and current replacement cost where they
goods available for sale ends up in both ending are held for:
inventory and cost of goods sold ◦ (a) Distribution at no charge or for a nominal charge; or

◦ (b) Consumption in the production process of goods to be16

distributed at no charge or for a nominal charge

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IPSAS 12: Subsequent Measurement

IPSAS 12 - Measurement
 Inventories reported at the Lower of Cost and
Net Realizable Value

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 Why? So not reported at more than the future
cash flows into the organization from their sale

 NRV = Est. SP in the ordinary course of business less

the estimated costs of completion and the estimated
costs to make the sale

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LCNRV – Exception to Raw Materials

IPSAS 12 - Measurement
LC and NRV example:  Materials and other supplies held
 Cost $ 80 for use in the production of inventories
 Selling price $ 84 are not written down below cost if the
 Cost to complete $ 5
related finished products are expected to
 Cost to sell 10% of SP
be sold, exchanged or distributed at or
above cost. [IPSAS 12.41]
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IPSAS 12: Recognition as an Expense

IPSAS 12 - Measurement
 Write-downs are recognized in surplus/deficit
 Subsequent write-ups permitted to max of prior
write-downs if:
- changed economic circumstances and NRV has
increased, prior situation no longer exists
 Reversals also taken to surplus/deficit
 When inventories are sold, exchanged or
distributed, their carrying amount shall be
recognized as an expense in the financial
period in which the related revenue is
recognized.
 If there is no related revenue, the expense is
recognized when these inventories are
distributed or when related services are
rendered.
 The amount of any write-down of inventories
and all losses of inventories shall be recognized
as an expense in the financial period the write-
down or loss occurs.
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LCNRV Recording Net Realizable Value

Methods of Applying LCNRV Illustration: Data for Z charity

 Mostly, companies price inventory on an item- Cost of goods sold (before adj. to NRV) Br.108,000
Ending inventory (cost) 82,000
by-item basis.
Ending inventory (at NRV) 70,000
 Group-Basis
Loss Loss Due to Decline to NRV 12,000
 Method should be applied consistently from Method Inventory (Br.82,000 – Br.70,000) 12,000
one period to another.

COGS Cost of Goods Sold 12,000

Method Inventory 12,000

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… Recording NRV Recording Net Realizable Value

Partial Statement of Financial Position St. of Fin. Performance

LCNRV Use of an Allowance

Use of an Allowance Partial Statement of Financial Position

Instead of crediting the Inventory account for NRV

adjustments, companies generally use an allowance
account.

Loss Method

Loss Due to Decline to NRV 12,000

Allowance to Reduce Inventory to NRV 12,000

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LCNRV Recovery of Inventory Loss

Recovery of Inventory Loss Allowance account is adjusted in subsequent periods, such

that inventory is reported at the LCNRV.
 Amount of write-down is reversed.
Illustration shows NRV evaluation for V-Charity and the effect of NRV
 Reversal limited to amount of original write-down.
adjustments on income.
Continuing the Z charity example, assume the NRV increases
to Br.74,000 (an increase of Br.4,000). Z makes the following
entry, using the loss method.

Allowance to Reduce Inventory to NRV 4,000

Recovery of Inventory Loss 4,000

LCNRV LCNRV

1: Muday manufactures desks. Most of the Muday’s desks are #1: Muday charitymanufactures desks. Most of the Muday’s desks
standard models and are sold on the basis of catalog prices. At are standard models and are sold on the basis of catalog prices. At
December 31, 2015, the following finished desks appear in the December 31, 2015, the following finished desks appear in the
Muday’s inventory. Muday’s inventory.

Instructions: At what amount should the desks appear in the Muday’s

December 31, 2015, inventory, assuming that Muday has adopted a
lower-of-FIFO-cost-or-NRV approach for valuation of inventories on an
individual-item basis?

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IPSAS 12 - Disclosure
Disclosures needed for:
 Accounting policies applied
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 Inventory remaining on SOFP
 Inventory costs recognized in profit or
loss
IPSAS 12 - Disclosure
Income statement related disclosures:
 Amount of inventory recognized as an
expense
 Amount of write-downs to NRV or other
losses
 Amount of any write-down reversals
 Circumstances that resulted in reversals
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IPSAS 12 - Disclosure
Balance sheet related disclosures:
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 Carrying amount in each category of
inventory (materials, WIP, finished goods,
production supplies, merchandise) and in
total
 Carrying amount of any inventory
measured at fair value less costs to sell
 Carrying amount of inventory pledged
as collateral for liabilities
IPSAS-27
Agriculture
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Introduction and Scope Definitions - I

 Objective - To prescribe the accounting
 Agricultural activity is the management by an
treatment and disclosures for agricultural entity of the biological transformation of
activity living animals or plants for sale, or for distribution
at no charge or for a nominal charge or for
 Scope: this Standard does not apply to: conversion into agricultural produce or into
additional biological assets.
(a) Land related to agricultural activity;
(b) Intangible assets related to agricultural
activity and
(c) Biological assets held for the provision or
supply of services (IPSAS 23)

Definitions - II Types of Biological Assets

 Agricultural produce: is the harvested product of
the entity’s biological assets.  Consumable biological assets are those
 Biological assets: are living animals or plants. assets that may either be harvested as
agricultural produce or sold as biological
 Biological transformation: comprises the processes
of growth, degeneration, production, and procreation assets.
that cause qualitative or quantitative changes in a
biological asset.
 Management of change enhancing or stabilising,  Bearer biological assets are those biological
those conditions which are necessary for the assets other than consumable biological
process of change to take place. assets. Bearer biological assets are self-
 Measurement of change in quality or the regenerating
quantity monitored as a routine management
function.

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Scope: Does not include
 Those used primarily for non-productive
purposes such as recreational parks or game
farms, or in delivering a service to the public,
for example dogs and horses used for
policing.
 Does not include management of native
forest, private game farms, wild life
conservancies and agro-tourism.
 processing of agricultural produce refers to
any artificial process after the point of
harvest
Ex: Biological assets, agricultural produce, and
products that are the result of processing
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Harvesting
 Harvesting is the detachment of produce from a
biological asset or the cessation of the life
processes of a biological asset.
 Agricultural produce harvested measured @ fair
value less costs to sell at the point of harvest.
 Subsequent to harvest treat as inventories
(IPSAS 12)
Practical Example - 1
 Entity A raises cattle, slaughters them at its
abattoirs and sells the carcasses to the local
meat market.
 Which of these activities are in the scope of
IPSAS 27?
Answer:
 Cattle = biological assets while they are living [IPSAS 27].
 When slaughtered = biological transformation ceases and
 the carcasses = agricultural produce [IPSAS 12].
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Practical Example - 2
 Entity B grows vines, harvests the grapes and
produces wine. Which of these activities are in
the scope of IPSAS 27?
• Grapevines = biological assets that continually
generate crops of grapes [Bearer Plant].
• When harvested the grapes = agri-produce.
• Processed Wine = Inventory
Fair value
Measured on initial recognition and at each
reporting date at its FVTPL.
A change in FV less costs to sell of a biological
asset be included in surplus or deficit for the
period in which it arises.
 In agri-activity, a change in physical attributes of
biological assets directly enhances or diminishes
economic benefits or service potential to the
entity.
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Initial recognition
An entity shall recognise a biological asset or
agricultural produce when and only when:
The entity controls the asset as a result of
past events
It is probable that future economic benefits
associated with asset will flow to the entity.
The fair value or cost of the asset can be
measured reliably.
Fair value
If an active market exists- quoted price
 If FV is based on its present location and condition:
 FV of cattle on a farm is the price for the cattle in the relevant market
less the transport and other costs of transporting those cattle to that
market.
Ifan entity has access to different active markets, -
market that it expects to use? [Determine the Principal Market]
In some circumstances, FV may be readily determinable
even through market determined prices or values are
not available for a biological asset in its present
condition.
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Fair Value
If an active market does not exist; use:
(a) Most recent market transaction price, provided
that there has not been a significant change in
economic circumstances between the date of
that transaction and the reporting date;
(b) Market prices for similar assets with adjustment
to reflect differences; and
(c) Sector benchmarks such as the value of an
Coffee expressed per ‘Feresula’, or bushel, or
hectare, and the value of cattle expressed per
kilogram of meat.
PV of expected cash flows
 Do not include any cash flows for
financing the assets, taxation, or
re-establishing biological assets
after harvest.
 Incorporates expectations about
possible variations in cash flows
into either the expected cash
flows, or the discount rate.
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Expected net cash flows
 Insome circumstances, market-
determined prices or values may not be
available for a biological asset in its
present condition.
 Uses the present value of expected
net cash flows discounted at a
current market-determined interest rate.
◦ Net cash flows that market participants would
expect the asset to generate in its most relevant
market.
Disclosures
A description of each class of biological assets
Distinguish b/n consumable and bearer
biological assets.
The methods and significant assumptions
applied in determining the fair value
A reconciliation of changes in the carrying
amount of biological assets between the beginning
and the end of the current period,
The gain and loss arising from changes in fair value
less costs to sell
Increases resulting from purchases.
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Disclosure
 The presumption that FV can be measured
 Decreases resulting from harvest.
 Increases resulting from business
combinations.
 Net exchange differences arising on the
translation of FS into a different presentation
currency and on the translation of a foreign
operation into the presentation currency of
the reporting entity.
 Other changes.
Measurement at cost
reliably can be rebutted only on initial
recognition for a biological asset for which
market-determined prices or values are not
available or are clearly unreliable.
 Measure @ Cost less accumulated depreciation
and any accumulated impairment losses.
 Measure agricultural produce harvested from its
biological assets at fair value less estimated costs
to sell at the point of harvest.

Disclosure
A description of each class of its biological
assets.
An explanation of why fair value cannot be
measured reliably

The depreciation method used

The useful lives or the depreciation rates used
The gross carrying amount and the
accumulated depreciation at the beginning and
at the end of the period.

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