ACCOUNTING MANUAL BEKAERT

Inventories
Table of contents

1. SCOPE

2. INTRODUCTION
2.1. What is included in inventories
2.2. Valuation principle

3. MEASUREMENT
3.1. Cost of inventories
3.1.1. Cost of purchase
3.1.2. Cost of conversion
a) Direct production costs
b) Indirect production costs
c) Manufacturing overhead
d) Economic depreciation charge
3.1.3. Other costs
3.2. Cost of inventories of a service provider
3.2.1. Direct costs
3.2.2. Initial costs
3.2.3. Indirect costs
3.2.4. Valuation method
3.3. First in, First out method (FIFO)
3.3.1. Definition
3.3.2. Standard costing: treatment of variances
a) Rate variances
b) Efficiency variances
 Quarterly (including year-end) reporting
 Year-end
c) Volume, manufacturing overhead and depreciation variances
d) Capitalization of variances
e) At the beginning of the new accounting year
3.4. Net realizable value (NRV)
3.5. Obsolete, slow moving and excess inventories
3.6. Spare parts
3.7. Customer spools

4. RECOGNITION AS AN EXPENSE

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5. LONG TERM CONSTRUCTION CONTRACTS
5.1. General
5.2. Combining and segmenting construction contracts
5.3. Contract revenue
5.4. Contract costs
5.5. Recognition of contract revenues and costs
5.5.1. Percentage of completion method
a) Policy outline
b) Fixed price contracts
c) Cost plus contracts
d) Making a reliable estimate
e) Accounting treatment
5.5.2. Outcome of contract cannot be reliably estimated
5.6. Recognition of expected losses
5.7. Changes in estimates

6. BEKAERT REPORTING REQUIREMENTS

6.1. BFC accounts
6.1.1. Balance Sheet
6.1.2. Income Statement
6.1.3. Statistical items
6.2. Other disclosures
6.2.1. BFC accounts

7. EXAMPLE

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1. Scope
This chapter will discuss the accounting for inventories. The major objective of accounting for inventories
is the accurate representation of inventories on hand as assets of the entity at the balance sheet date.
This chapter is based upon IAS 2 'Inventories' and IAS 11 ‘Construction Contracts’.

2. Introduction

2.1. What is included in inventories

Inventories are assets: IAS 2 §6

• held for sale in the ordinary course of business;
• 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;
• in the case of a service provider, inventories include the costs of the service, for which the entity has
not yet recognized the related revenue.
Inventories encompass goods purchased and held for resale, finished goods produced, work in progress, IAS 2 §8
and materials and supplies awaiting use in the production process.
These include items that are:
• physically on hand, other than items received on consignment;
• in transit to the company with F.O.B. shipping point terms;
• delivered on consignment;
• in possession of others for storage, repair, processing, etc.;
• supplies and repair items for fixed assets (central stores inventory).
All inventories in transit to customers (both intercompany and third parties) are initially treated as ex-
works sales for reasons of administrative simplicity. In the selling company, the sale and the receivable
are recognized and the inventory value is credited when the goods are shipped. However, the selling
company shall derecognize any sales for which the significant risks and rewards of ownership of the
goods have not been transferred at the balance sheet date.
Strategic spare parts are kept as inventories and recognized as an expense as consumed (IAS 16, IAS 16 §8
paragraph 11). See section 3.6 in this chapter.
As from year-end 2008, it has been decided that advances paid should be reported separately as a
receivable. Before that, advances paid for the purchase of assets were reported in the same asset
category (intangibles, PP&E , inventories) as the assets to which they related. The latter practice
originated from Belgian statutory accounting and has been identified as non-compliant with IFRS. The
main reason for non-compliance is that, when an entity makes a down payment for an asset (e.g. a
shipment of wire rod), this asset does not yet meet the IFRS recognition criteria. More to the point: the
goods purchased are not yet controlled by the entity. The down payment even becomes refundable when
the supplier fails to meet his obligations. Consequently, it is more appropriate to classify down payments
as receivables (i.e. financial assets in accordance with IAS 32).

2.2. Valuation principle

Inventories must be valued at the lower of cost and net realizable value. IAS 2 §9
In determining cost, the First-In, First-Out (FIFO) formula will be used. Obsolete, damaged and non-
marketable inventories must be written down to estimated net realizable value. Such write-downs must
be recognized in cost of sales.

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3. Measurement

3.1. Cost of inventories

The cost of inventories should comprise all costs of purchase, costs of conversion and other costs IAS 2 §10
incurred in bringing the inventories to their present location and condition. Direct costing is not allowed.

3.1.1. Cost of purchase IAS 2 §11

The costs of purchase of inventories comprise the purchase price (raw materials, consumables, central
stores items), import duties and other taxes (excluding recoverable value-added taxes), and transport,
handling and other costs directly attributable to the acquisition of finished goods, materials and services.
Trade discounts, rebates and other similar items are deducted in determining the costs of purchase, and
so reduce inventory value. This also means that cash discounts are deducted from inventory cost, and
not reported as a financial income.

3.1.2. Cost of conversion IAS 2 §12-14

The costs of conversion of inventories include all costs directly related to the units of production, such as
direct labor. They also include a systematic allocation of fixed and variable production overheads that are
incurred in converting materials into finished goods. Fixed production overheads are those indirect costs
of production that remain relatively constant regardless of the volume of production, such as depreciation
and maintenance of factory buildings and equipment, and the cost of factory management and admini-
stration. Variable production overheads are those indirect costs of production that vary directly, or nearly
directly, with the volume of production, such as indirect materials and indirect labor.
The allocation of fixed production overheads to the costs of conversion is based on the representative
capacity of the production facilities. Representative capacity is the capacity derived from a representative
mix of finished products with a representative volume and relates to “normal” volumes occurring in
“normal” years. This capacity level should be re-assessed annually during the X+1 process. Changes
should be approved by BU control. For products in a start-up phase, the representative capacity will
generally be based on X+3-volumes, while for products being phased out, it should be based on the
volume of the last “representative” year. The amount of fixed overhead allocated to each unit of production
is not increased as a consequence of low production or idle plant. Unallocated overheads are recognized
as an expense in the period in which they are incurred. In periods of abnormally high production, the
amount of fixed overhead allocated to each unit of production is decreased so that inventories are not
measured above cost.
A production process may result in more than one product being produced simultaneously. This is the
case, for example, when joint products are produced or when there is a main product and a by-product.
When the costs of conversion of each product are not separately identifiable, they are allocated between
the products on a rational and consistent basis. The allocation may be based, for example, on the relative
sales value of each product either at the stage in the production process when the products become
separately identifiable, or at the completion of production. Most by-products, by their nature, are
immaterial. When this is the case, they are often measured at net realizable value and this value is
deducted from the cost of the main product. As a result, the carrying amount of the main product is not
materially different from its cost.
Following expenditure should be included in manufacturing cost and as a consequence also in inventory
cost:
a) Direct production costs
The list of items belonging to either direct or indirect production costs should be regarded as
indicative and may vary between Business Units. Direct production costs typically comprise:
• consumption of raw materials
• consumption or purchase expenditure of consumables that can be identified on the finished
product (e.g. zinc, plastic coating, etc.)
• direct labor
For goods manufactured, assembled, processed or otherwise changed in form, content or utility, the
wages of workers and employees directly engaged in the production process are part of the inventory
cost. The costs include the wages increased by statutory (= legally imposed) and voluntary (social
fund, extra-legal pension costs, etc.) social charges.

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b) Indirect production costs
Indirect production costs comprise:
• other consumables used in the manufacturing process and which do not form part of the finished
product
• utility service, energy cost and energy distribution cost
• packing material (sometimes regarded as direct cost)
• maintenance cost
• packing costs
• warehousing and other inventory handling cost, providing that it relates to expenses incurred for
bringing goods at their present location
• loading and transportation cost inside the warehouses, as well as the cost of transportation
between the different production units
• handling cost (loading, transport) of goods consigned to customers
c) Manufacturing overhead
The principles to be used when determining the manufacturing overhead are the following:
• If the expense relates to management of more than one manufacturing plant, this is usually an
indication that it should not be included in the inventory value and consequently in Cost of Sales.
Examples are regional management, business platform management, product & market
management, …
• Expenses incurred for one specific manufacturing plant are only taken into account if they relate to
the manufacturing cycle. Expenses incurred at cost centers (mainly) servicing customers and R&D
are excluded. As such order intake, shipping, billing, Accounts Receivable, direct and indirect
selling activities, customer support, technical services, R&D, General Ledger accounting, transport
insurance for sold goods, credit insurance, … are to be excluded from the inventory value.
• When allocating plant expenses, only that part of the expense allocated to cost centers belonging
to the manufacturing cycle, is to be considered. If no allocation key is used for the moment, the
entire expense is taken into account for the inventory value. Examples are IT running-cost,
personnel department, personnel related insurance and contributions, …
The following is a non-exhaustive list of expenses considered as manufacturing overhead:
• production management departments
• plant purchase departments (including an allocated portion of corporate procurement:
NV Bekaert SA case)
• management of maintenance departments
• laboratory and quality services for the production process
• production planning department
• plant control department
• accounts payable and fixed asset ledger
• expenses of other production supporting services/functions, such as IT department, personnel
administration, printing office, canteen and cafeteria, medical service, bus services, safety service
• housing expenses relating to production units and including expenses for guarding and patrimony
• property damage insurance expenses for production facilities
• taxes, insurance and other cost for vehicles directly used in the manufacturing process
• other manufacturing related insurances1, e.g. business interruption, general liability, product
liability, aircraft liability, pollution, workers’ compensation
• real estate taxes on production facilities (buildings)
• municipal taxes that are function of production parameters
• administrative expenses directly related to the production process, such as traveling expenses,
mail, telephone, memberships, training, documentation
• rent of production buildings and machines
d) Economic depreciation charge
The cost of inventories also comprises an economic depreciation charge of assets used in the
production process. Any depreciation related to temporary excess of the installed capacity over the
representative capacity should not be capitalized in inventories.

3.1.3. Other costs

1 Please refer to the ‘Insurance’ document in the interpretations section of the Bekaert accounting manual for more
guidance on how to present various kinds of insurance charges in the income statement.
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Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the
inventories to their present location and condition. For example, it may be appropriate to include non-
IAS 2 §15
production overheads or the costs of designing products for specific customers in the cost of inventories.
Examples of costs excluded from the cost of inventories and recognized as expenses in the period in
which they are incurred are:
IAS 2 §16
• abnormal amounts of wasted materials, labor, 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
Extraordinary production expenses and inefficiencies, such as costs of relocating from one plant site to
another, unusual repairs because of a catastrophe, costs incurred during a strike, obsolescence costs
and abnormal scrap losses, also should be excluded from inventory costs and should be recognized in
profit or loss when incurred.
Costs incurred in transporting an item from a warehouse to its initial point of sale should be capitalized to
inventories. However, costs associated with moving inventories from one point of sale to another (e.g.
transport of goods between stores) should not be included in the cost of inventories because the goods
were already in a condition and location for sale before the move.
In most Bekaert entities, the finished goods warehouse at the plant is in itself a point of sale, so freight
costs to transport the goods to another warehouse (point of sale) should not be capitalized to inventories.
Some entities (e.g. Prodalam) operate a distribution business model with a distribution center and own
local stores or branches. If the distribution center is in itself not a point of sale, because goods are only
sold from local branches, the freight cost to move the goods from the distribution center to the local
branches should be capitalized to inventories.

3.2. Cost of inventories of a service provider

IAS 2 §19
The cost of inventories of a service provider consists primarily of the labor and other costs of personnel
directly engaged in providing the service, including supervisory personnel, and attributable overheads.
Labor and other costs relating to sales and general administrative personnel are not included but are
recognized as expenses in the period in which they are incurred.
Costs related to the supply of services consist of direct, initial costs and indirect costs.

3.2.1. Direct costs

Direct costs are those that are clearly identifiable with a transaction or group of transactions.
Direct costs should be recognized proportionally as the related revenues are recognized. Because
revenues are generally recognized and the related direct costs incurred as the services are performed,
such costs should not be deferred. However, if revenue recognition is deferred, the related direct costs
should also be deferred. In the balance sheet, deferred direct costs should be reflected as a separate
asset, deferred revenues should be classified as a liability.

3.2.2. Initial costs

Costs incurred in selling the service or activity are referred to as initial costs. They should be expensed
when incurred.

3.2.3. Indirect costs

Indirect costs are those fixed and other costs such as occupancy, supervision and general and admini-
strative expenses that cannot be identified with a transaction or group of transactions or that continue to
be incurred irrespective of the volume of transactions. Indirect costs should be expensed as incurred.

3.2.4. Valuation method

For the valuation of contracts in progress for service and consultancy contracts, following rules should be
applied:
• Actual expenses are recorded per project and transferred (debited) to work-in-process at cost.
• At contractual milestone invoicing, the proportional income is recognized based on a reasonable
estimate. This means that work-in-process is credited and charged to income in the proportion:
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Milestone invoice
Total project amount to be invoiced
Invoicing of a maximum of work-in-process at year-end is strongly recommended:
• When a loss on a project is foreseen, a provision for the total loss should be set up as soon as the
loss can be reasonably estimated (see also Chapter XX ‘Provisions, Contingent liabilities and
Contingent assets’ paragraph 6.2.)
• Profits, beyond normal margin, are only recognized at the completion of the contracts.
Advances on contracts in progress
Progress payments and advances received from customers are not a measure of the stage of completion.
As such, invoicing of advances on contracts in progress should not be considered as sales. Such
advances are in principle to be deducted from the first milestone invoice. If the advance is greater than the
value of the first invoice, the balance is deducted from the second milestone invoice, etc.

3.3. First In, First Out method (FIFO)

3.3.1. Definition
The FIFO cost method assumes that the first goods purchased are the first goods used or sold, regardless
of the actual physical flow. This method most clearly reflects periodic income by matching the first cost
incurred with the first revenue produced, and it approximates the results that would be obtained by the
specific identification method. Because the earliest goods purchased are the first ones removed from the
inventory account, the remaining balance is composed of items acquired at more recent costs.
Example: FIFO method

Units Units Actual Actual

available sold unit cost total cost

Beginning inventory 100 - 2,10 210

Sale - 75 - -
Purchase 150 - 2,80 420
Sale - 100 - -
Purchase 50 - 3,00 150
Total 300 175 780

Given the above data, the cost of goods sold and the ending inventory balance are determined as
follows:

Units Unit cost Total cost

Cost of goods sold 100 2,10 210
75 2,80 210
175 420

Ending inventory 50 3,00 150

75 2,80 210
125 360

Note that the total of the units in cost of goods sold and ending inventory, as well as the sum of their total
costs, is equal to the goods available for sale and their respective total costs. When standard costing is
used, FIFO-adjustments are required in order to properly value inventory items at actual cost of goods
produced or acquired (see below). Standard costing is used by most Bekaert entities for raw materials,
work-in-process and finished goods. Other inventories (consumables, spare parts) are carried at moving
average cost by most Bekaert entities.

3.3.2. Standard costing: treatment of variances

Standard costs used during the year should approximate actual (FIFO) cost. Standard costs take into
account normal levels of materials and supplies, labor, efficiency and capacity utilization. They should be
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reviewed annually and, if necessary, revised in the light of current conditions.
Differences between the standard cost and actual (FIFO) cost are considered as variances. The total
variance can be split up into several components:
• Rate variances relate to differences between standard and actual price of purchased materials,
consumables, labor and utilities.
• Efficiency variances relate to differences between standard and actual usage of man-hours,
machine efficiency (if applicable), maintenance, quality, consumables, packing materials, utilities,
production method.
• Volume variances relate to under- or over-absorption of budget manufacturing overhead because
production activity deviates from representative capacity.
• Manufacturing overhead variances relate to the difference between budget manufacturing
overheads and actual manufacturing overheads.
• Depreciation variances relate to the difference between budget and actual depreciation on manu-
facturing fixed assets.

a) Rate variances
 Rate variances on purchased raw materials, halfproducts and finished goods
When materials are purchased, the inventory is debited at the standard cost and any purchase
price variance (‘PPV’= the difference between standard and actual cost) is adjusted to cost of sales.
At quarter-end the purchased materials should be revalued at their deemed actual cost based on
the FIFO assumption that the ‘oldest’ materials (first-in) were the first ones to be processed and/or
shipped (first-out). The FIFO revaluation should be done for purchased materials both unprocessed
and processed in work in process and finished goods. When standard prices are updated
infrequently (e.g. on a quarterly basis), the FIFO revaluation usually consists in determining the
amount of PPVs that relates to the relevant purchase period (typically less than 3 months) for the
current inventories and capitalizing it by adjusting inventories against cost of sales. A more refined
approach should be used when standard costs are frequently updated (say on a monthly basis),
since the PPVs for the relevant period may have been derived from prior standard prices.
Additional guidance can be found in the FIFO adjustments on wire rod interpretation in the
Interpretations section of the Accounting Manual on Intranet. When standard prices of purchased
(raw) materials are updated, the revaluation effect is immediately recognized both in the balance
sheet (inventories) and in the income statement (cost of sales). To the extent that the standard
(raw) material cost included in the inventory value at the end of the period significantly varies from
its FIFO cost, FIFO adjustments are posted to correct the misstatement.
 Other rate variances
FIFO adjustments for other rate variances (e.g. utilities, wages and salaries) are handled in the
same way as efficiency variances.

b) Efficiency variances
 Quarterly (including year-end) reporting
At the end of each quarterly reporting period, at plant level, the capitalization of rate and efficiency
variances should be reviewed in accordance with the following guidelines:
• If the standard is not a realistic target (i.e. either obsolete or not currently attainable) and if the
variance is recurring (periodically in the same direction), which will lead to alteration of the
standard in the next planning period, then the variance is to be capitalized.
• If the variance is due to exceptional operational conditions, then the variance cannot be
capitalized.
• In case, for quarterly reporting purposes (1st, 2nd, 3rd quarter only), the difference between
the capitalizable variances of two consecutive quarterly reporting periods is immaterial (to be
determined on BU level), then no adjustment to the capitalized variance is to be made.
 Year-end
If the efficiency variances of December are mostly attributable to the limited number of working
days and to year-end adjustments, they can be excluded. In this case, the efficiency variances of
November and of preceding months (depending upon the inventory turnover period) are to be used
for capitalization purposes. This rule only applies to efficiency variances.
At year-end, full application of the rules is required.
c) Volume, manufacturing overhead and depreciation variances
Capitalization of volume, manufacturing overhead and depreciation variances should only be
considered at year-end.
Negative volume variances should not be capitalized, except in very rare cases when structural
changes to the plant organization are made during the year leading to significant reductions in plant

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capacity. However, inventory value should be corrected for positive volume variances arising from
an ongoing over-absorption of overheads.
Manufacturing overhead variances should be capitalized in case of material deviations and in
accordance with the above stated guidelines. Approval is needed from BU control. The manufacturing
overheads are defined earlier in this chapter (section 3.1.2.).
Depreciation variances are to be capitalized in inventory.
d) Capitalization of variances
Variances to be capitalized should be based on the inventory turnover period. This means that if
the inventory turnover equals e.g. 4 at year-end, three months inventory purchases and/or inventory
production are on hand; the variances incurred over that latter period should be considered to be
capitalized.
As the variances relate to raw materials, work-in-process and finished goods, turnover for each of
those inventory categories should be computed to allow for a proper capitalization. Inventory turnover
can be computed as follows:
Cost of goods sold for the period
x=
Inventory on hand
Then, the total number of months of purchases or production equals:
12 (months)
x
For departments having an important inventory build-up at year-end, we recommend to use a more
precise method considering the weight of raw materials and consumables (tonnage) entered into
production during the last months starting with Dec/Nov/Oct, etc. and comparing these quantities with
the quantity of the inventory on hand at year-end (same system as used for trade receivables).
e) At the beginning of a new accounting year
Standard production norms, rates, direct costs, indirect costs and manufacturing overheads are
thoroughly reviewed during the annual budget exercise, which results in new standards for the year to
come. At the beginning of a new accounting year, the inventories are revalued at new standards. To
avoid any material departures from the FIFO principle, the revaluation effect is recognized over the
the period(s) that the inventories are sold.

IAS 2 §6
3.4. Net realizable value (NRV) (normal inventory items)
Net realizable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
The practice of writing down inventories below cost to net realizable value is consistent with the view that
assets should not be carried in excess of amounts expected to be realized from their sale or use.
Inventories are written down to net realizable value on an item by item basis. However, when the future
recoverability is assured (e.g. order based production), the cost is the basis for valuation at balance sheet
date.
Example
(1) (2) (3) (4) = (3) - (2) (4) - (1)

Item Cost Cost to Est. selling NRV NRV

complete & sell price reserve

A 2.00 0.50 2.50 2.00 0.00

B 4.00 0.80 4.00 3.20 -0.80
C 6.00 1.00 10.00 9.00 3.00
D 5.00 2.00 6.00 4.00 -1.00
E 1.00 0.25 1.26 1.01 0.01

This example indicates that an NRV reserve is only recorded when the net realizable value is lower than
the cost (items B and D in this case). The write-down of the inventory (equal to the NRV reserve) is

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charged to income as Cost of Sales. An automatic write-down of raw materials to a lower market value is
not appropriate. IAS 2 §32

Materials and other supplies held for use in the production of inventories are not written down below cost
if the finished products in which they will be incorporated are expected to be sold at or above cost.
However, when a decline in the price of materials indicates that the cost of the finished products will
exceed net realizable value, the materials are written down to net realizable value. In such circumstances,
the replacement cost of the materials may be the best available measure of their net realizable value. IAS 2 §33

A new assessment is made of net realizable value in each subsequent period. When the circumstances
which previously caused inventories to be written down below cost no longer exist, the amount of the
write-down is reversed so that the new carrying amount is the lower of the cost and the revised net
realizable value. This occurs, for example, when an item of inventory, which is carried at net realizable
value because its selling price has declined, is still on hand in a subsequent period and its selling price
has increased.
In case of a restructuring program, e.g. a plant close-down or a relocation of manufacturing operations,
the NRV of inventories will probably be lower than in a going concern. Therefore, a specific and detailed
assessment of the NRV of all inventories involved should be made when the restructuring becomes
probable, and any resulting write-downs to NRV should be recognized immediately.

IAS 2 §28
3.5. Obsolete, slow moving and excess inventories
The cost of inventories may not be recoverable if those inventories are damaged, if they have become
wholly or partially obsolete, or if the quantities of items exceed anticipated sales or usage for a reasonable
period. Such inventories should be carried at net realizable value. When individual batches of inventories
can be deemed unsaleable at their normal price for specific reasons, write-downs to their expected
recoverable amount should be recognized immediately. Conversely, when there is clear evidence that
individual batches of inventories will be sold in the near future at the normal price, no write-downs for
obsolescence should be recognized, even if ageing criteria for obsolescence write-downs are met.
Central store items
Historical consumption is the basis for write-down in all companies/entities of the Group (majority owned).
All inventories in excess of an average consumption of 36 months will be fully written off.
Example
100 bearings in inventory at December 31, 20X3
Consumption 20X1: 20
Consumption 20X2: 30
Consumption 20X3: 40
Total Consumption 90
Consumption last 36 months = 90
Value of 10 bearings will be written-off
New inventory items added to the central store during the last year are not written off in that year.
Inventory items not having a 36-month historical consumption record should be treated as follows:
expected 36 months consumption is calculated based on the consumption history already known.

Example
If 120 pieces in inventory at December 31, 20X3
Consumption 30.6.20X2 till 31.12.20X2 (=6 months) : 18
Consumption 01.1.20X3 till 31.12.20X3 (=12 months): 36
Total consumption 54
Average monthly consumption: 54/18 = 3
Calculated 36 months consumption: 3 x 36 = 108
Value of 12 pieces will be written off.
Rubber Reinforcement and Sawing Wire
Rod, WIP and finished products: 100% write-down (scrap value) when more than 1 year old..
The NRV for specific types of second choice material should be supplied by regional sales managers
responsible for second choice material sales. Controllers should check regularly with regional sales
management if applied NRV’s still represent market reality.

Stainless
The inventory write-off rule is based upon excess of stock and not on obsolete stock. Rule is as follows:
• The calculation is done on material/plant level. When the same material is defined in two or more
plants, each will have their own calculation without taking into account any figures from the other
plants.

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• Materials which have a lifetime (based upon the first goods-receipt-date) that is less than one year
are NOT taken into account for write-off, because there is not enough historical information to judge.
• For all the other materials :
− Average consumption / month is calculated based upon the consumptions of the last year.
− The stock-coverage (in months) is calculated based upon the total stock end-of-month divided by
the average consumption / month.
− Total stock means : independent of the location or status of the stock the quantity is totalized on
level material / plant. (stock of the same material in different plants will have their own write-off
calculation)
− Then depending on the value of the stock-coverage the write-off percentage is determined :
• Stock-coverage <= 12 months: 0 %
• Stock-coverage > 12 and <= 24 months: 33 %
• Stock-coverage > 24 and <= 36 months: 66 %
• Stock-coverage > 36 months:100 %
− The write-off percentage is calculated on the total stock-value.
Example
Partnumber X : stock 300 PC, value 10€/PC, consumption last year 240 PC.
Average consumption / month : 240 / 12 = 20 PC /month
Stock-coverage : 300 / 20 = 15 months
Write-off percentage % : 33 %
Write-off provision proposed : 300 PC * 10€/PC * 33 % = 990 €

Other Business Platforms

Raw materials
• Wire rod: more than 18 months on rod yard: scrap value
WIP: older than 6 months on hand = scrap value
Finished Goods
• Plants
− less than 12 months on hand: no write-down
− less than 24 months on hand: 50% write-down
− more than 24 months on hand: 100% write-down (scrap value)
• Off-site warehouses (not applicable for Advanced Cords)
− less than 24 months on hand: no write-down
− less than 36 months on hand: 50% write-down
− more than 36 months on hand: 100% write-down (scrap value)
FUT (Engineering)
• Unassigned Project stock (parts used in the assembly of equipment) follows the same write-down
logic as the central store items
• WIP and Finished Goods: no general write-downs. Open projects and/or finished goods are reviewed
at least once a year with sales responsible(s) to assess whether an obsolescence reserve needs to
be taken.
However, if there is clear evidence that these write-down rules produce a carrying amount which is higher
than the net realizable value (e.g. no customers anymore), the lower net realizable value has to be
withheld.

IAS 16 §8
3.6. Spare parts
Spare parts, strategic and normal, irrespective of the moment of purchase, are generally considered and
booked as inventory items. At the moment of use, they are expensed.
In rare cases, spare parts are not booked as inventory items but directly expensed.
Strategic parts are kept in inventory to avoid the risk of production standstills. Until recently, strategic
parts with a value of 650 EUR and above were not written down. As from year-end 2009, this exception
has been eliminated and strategic parts are subject to the same generic write-down rules as normal
spare parts.

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3.7. Customer spools
In principle, new customer spools should be shown as inventory items i.e. they should be valued at cost
and fully expensed when used. In case customer spools are directly expensed, then a correction of the
expense needs to be done at year-end for the remaining new unused spools in order to take them into
inventory. The correction needs to be reversed at the beginning of the next accounting year. Reparation
costs are expensed when incurred. The carrying amount of used spools is zero.

Bead wire spools (e.g. BS900) that are used as production and customer spools need to be treated as
customer spools.

4. Recognition as an expense
When inventories are sold, the carrying amount of those inventories should be recognized as an expense IAS 2 §34
in the period in which the related revenue is recognized. The amount of any write-down of inventories to
net realizable value and all losses of inventories should be recognized 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 realizable value, should be recognized as a reduction in the cost of sales in the period in
which the reversal occurs.
The process of recognizing as an expense the carrying amount of inventories sold results in the matching
of costs and revenues.

5. Long term construction contracts

5.1. General
IAS 11 ‘Construction contracts’ will be superseded by IFRS 15 ‘Revenue from Contracts with Customers’,
effective 1 January 2018.
For practical purposes, a construction contract is a contract specifically negotiated for the construction
of an asset (or closely related combination of assets) and in respect of which the date when the contract
activity is entered into and the date when the contract activity is completed fall into different accounting
periods.
When the outcome of a construction contract can be estimated reliably, contract revenue and contract IAS 11 §22
costs (and hence profits) associated with the construction contract have to be recognized as revenue and
expenses respectively by reference to the stage of completion of the contract activity (percentage of
completion method) at the balance sheet date. When the outcome of a construction contract cannot be IAS 11 §32
estimated reliably, revenue should be recognized only to the extent of contract costs incurred which will
probably be recoverable. An expected loss on the construction contract should be recognized as an
expense immediately.
The following elements should normally be considered when determining whether the outcome of a
construction project can be estimated reliably:
• the total amount of contract revenue (section 5.3);
• the total amount of contract costs (section 5.4); and
• the methodology of recognizing revenues and costs in the income statement (section 5.5).
5.2. Combining and segmenting construction contracts
IAS 11 §8
When a contract covers a number of assets, the construction of each asset should be treated as a
separate construction contract when:
• separate proposals have been submitted for each asset;
• each asset has been subject to separate negotiation and the contractor and customer have been able
to accept or reject that part of the contract relating to each asset; and
• the costs and revenues of each asset can be identified.
IAS 11 §9
A group of contracts, whether with a single customer or with several customers, should be treated as a
single construction contract when:
• the group of contracts is negotiated as a single package;
• the contracts are so closely interrelated that they are, in effect, part of a single project with an overall
profit margin; and

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• the contracts are performed concurrently or in a continuous sequence. IAS 11 §10
A contract may provide for the construction of an additional asset at the option of the customer or may be
amended to include the construction of an additional asset. The construction of the additional asset
should be treated as a separate construction contract when:
• the asset differs significantly in design, technology or function from the asset or assets covered by the
original contract; or
• the price of the asset is negotiated without regard to the original contract price.

5.3. Contract revenue

IAS 11 §11
Contract revenue should comprise:
• the initial amount of revenue agreed in the contract, and
• variations in contract work, claims and incentive payments, to the extent that it is probable that they
will result in revenue and they are capable of being reliably measured. IAS 11 §12
Contract revenue is measured at the fair value of the consideration received or receivable. The measure-
ment of contract revenue is affected by a variety of uncertainties that depend on the outcome of future
events. The estimates often need to be revised as events occur and uncertainties are resolved.
Therefore, the amount of contract revenue may increase or decrease from one period to the next.
Example
• A contractor and a customer may agree variations or claims that increase or decrease contract
revenue in a period subsequent to that in which the contract was initially agreed.
• The amount of revenue agreed in a fixed price contract may increase as a result of cost escalation
clauses.
• The amount of contract revenue may decrease as a result of penalties arising from delays caused by
the contractor in the completion of the contract.
• When a fixed price contract involves a fixed price per unit of output, contract revenue increases as the
number of units is increased.
A variation is an instruction by the customer for a change in the scope of the work to be performed under IAS 11 §13
the contract. A variation may lead to an increase or a decrease in contract revenue. Examples of
variations are changes in the specifications or design of the asset and changes in the duration of the
contract. A variation is included in contract revenue when:
• it is probable that the customer will approve the variation and the amount of revenue arising from the
variation, and
• the amount of revenue can be reliably measured.
A claim is an amount that the contractor seeks to collect from the customer or another party as reimburse- IAS 11 §14
ment for costs not included in the contract price. A claim may arise from, for example, customer caused
delays, errors in specifications or design, and disputed variations in contract work. The measurement of
the amounts of revenue arising from claims is subject to a high level of uncertainty and often depends on
the outcome of negotiations. Therefore, claims are only included in contract revenue when:
• negotiations have reached an advanced stage such that it is probable that the customer will accept
the claim and
• the amount that it is probable will be accepted by the customer can be measured reliably
Incentive payments are additional amounts paid to the contractor if specified performance standards are IAS 11 §15
met or exceeded. For example, a contract may allow for an incentive payment to the contractor for early
completion of the contract. Incentive payments are included in contract revenue when:
• the contract is sufficiently advanced that it is probable that the specified performance standards will
be met or exceeded and
• the amount of the incentive payment can be measured reliably
5.4. Contract costs
Contract costs should comprise: IAS 11 §16
• costs that relate directly to the specific contract
• costs that are attributable to the contract activity in general and can be allocated to the contract and
• such other costs as are specifically chargeable to the customer under the terms of the contract
Costs that relate directly to a specific contract include: IAS 11 §17
• site labor costs, including site supervision
• costs of materials used in construction
• depreciation of plant and equipment used on the contract
• costs of moving plant, equipment and materials to and from the contract site
• costs of hiring plant and equipment

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• costs of design and technical assistance that is directly related to the contract
• the estimated costs of rectification and guarantee work, including expected warranty costs and
• claims from third parties
These costs may be reduced by any incidental income that is not included in contract revenue, for
example income from the sale of surplus materials and the disposal of plant and equipment at the end of
the contract.
IAS 11 §18
Indirect costs or overhead expenses should be included in contract costs provided that they are
attributable to the contracting activity and could be allocated to specific contracts:
• insurance
• costs of design and technical assistance that is not directly related to a specific contract and
• construction overheads
They should be allocated using methods that are systematic and rational and are applied in a consistent
manner to costs having similar features or characteristics.
IAS 11 §20
Costs that cannot be attributed to contract activity or cannot be allocated to a contract are excluded from
the costs of a construction contract. Such costs include:
• general administration costs for which reimbursement is not specified in the contract
• selling costs
• research and development costs for which reimbursement is not specified in the contract and
• depreciation of idle plant and equipment that is not used on a particular contract

5.5. Recognition of contract revenues and costs

5.5.1. Percentage of completion method
a) Policy outline IAS 11 §22, 25
When the outcome of a construction contract can be estimated reliably, contract revenue and contract
costs associated with the construction contract should be recognized as revenue and expenses
respectively by reference to the stage of completion of the contract activity at the balance sheet date
(‘percentage of completion method’). Thus contract revenue is matched with the contract costs
incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit
which can be attributed to the proportion of work completed.
An expected loss on the construction contract should be recognized as an expense immediately.
b) Fixed price contracts IAS 11 §23
In case of a fixed price contract, the outcome of a construction contract can be estimated reliably
when all the following conditions are satisfied:
• total contract revenue can be measured reliably;
• it is probable that the economic benefits associated with the contract will flow to the entity;
• both the contract costs to complete the contract and the stage of contract completion at the
balance sheet date can be measured reliably; and
• the contract costs attributable to the contract can be clearly identified and measured reliably so
that actual contract costs incurred can be compared with prior estimates.
c) Cost plus contracts IAS 11 §24
In case of a cost plus contract, the outcome of a construction contract can be estimated reliably when
both the following conditions are satisfied:
• it is probable that the economic benefits associated with the contract will flow to the entity; and
• the contract costs attributable to the contract whether or not specifically reimbursable, can be
clearly identified and measured reliably.

d) Making a reliable estimate

IAS 11 §29
An entity is generally able to make reliable estimates after it has agreed to a contract which establishes
• each party's enforceable rights regarding the asset to be constructed;
• the consideration to be exchanged; and
• the manner and terms of settlement.
It is also usually necessary for the entity to have an effective internal financial budgeting and reporting
system. The entity reviews and, when necessary, revises the estimates of contract revenue and
contract costs as the contract progresses. The need for such revisions does not necessarily indicate
that the outcome of the contract cannot be estimated reliably.
IAS 11 §30
The stage of completion of a contract may be determined in a variety of ways. The entity must use the
method that measures reliably the work performed. Depending on the nature of the contract, the
methods may include:

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• the proportion that contract costs incurred for work performed to date bear to the estimated total
contract costs;
• surveys of work performed; or
• completion of a physical proportion of the contract work. IAS 11 §31
When the stage of completion is determined by reference to the contract costs incurred to date, only
those contract costs which reflect work already performed are included in costs incurred to date. Any
costs that relate to future activity on the contract (e.g. standard as distinct from specially made
materials) are excluded from this calculation.
Costs which relate to future activity are recognized as an asset provided it is probable that they will be
recovered. Such costs represent an amount due from the customer and are often classified as
contract work in progress.
Progress payments and advances received from customers often do not reflect the work performed.
e) Accounting treatment
Accounting treatment (if the above criteria are fulfilled):
A construction-in-progress (CIP) account should be used to accumulate costs and recognized
income. When the CIP exceeds billings, the difference is reported as a current asset. If billings
exceed CIP, the difference is reported as a current liability. Note that, when more than one contract
exists, the net debit balances of certain contracts should not be offset against the net credit balances
of other contracts.
Formula

Total cost to date X Total estimated - Gross profit already

Estimated total cost gross profit or loss recognized to date
Note that income should not be based on advances (i.e. cash collections) or progress (interim)
billings. Cash collections and interim billings are based on contract terms that do not necessarily
measure contract performance.
For the accounting treatment of service and consultancy contracts in progress please refer to section
3.2 of this chapter.

5.5.2. Outcome of contract cannot be reliably estimated

If these criteria are not met the revenue should only be recognized to the extent of contract costs incurred
that are likely to be recoverable and contract costs should be recognized as an expense in the period in
which they are incurred. IAS 11 §32
When the uncertainties that prevented the outcome of the contract being estimated reliably no longer
exist, revenue and expenses associated with the construction contract should be recognized in
accordance with paragraph 5.5.1.

5.6. Recognition of expected losses

IAS 11 §36
When it is probable that total contract costs will exceed total contract revenue, the expected loss should
be recognized as an expense immediately.
IAS 11 §37
The amount of such a loss is determined irrespective of:
• whether or not work has commenced on the contract;
• the stage of completion of contract activity;
• the amount of profits expected to arise on other contracts which are not treated as a single
construction contract IAS 11 §38
5.7. Changes in estimates
The percentage of completion method is applied on a cumulative basis in each accounting period to the
current estimates of contract revenue and contract costs. Therefore, the effect of a change in the
estimate of contract revenue or contract costs, or the effect of a change in estimate of the outcome of a
contract, is accounted for as a change in accounting estimate in accordance with IAS 8 ‘Accounting
Policies, Changes in Accounting Estimates and Errors’. The changed estimates are used in the
determination of the amount of revenue and expenses recognized in the income statement in the period
in which the change is made and in subsequent periods.

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6. Bekaert reporting requirements

6.1. BFC accounts

6.1.1. Balance Sheet

A30101 Wire rod – cost
A30109 Wire rod – accumulated write-downs
A30191 Other raw material – cost
A30199 Other raw material – accumulated write-downs
TA3010 Raw materials
A31001 Consumables – cost
A31009 Consumables – accumulated write-downs
TA3100 Consumables
A31101 Spare parts – cost
A31109 Spare parts – accumulated write-downs
TA3110 Spare parts
A32001 Work in progress – own production - cost
A32009 Work in progress – own production - accumulated write-downs
A32011 Work in progress – purchased HP - cost
A32019 Work in progress – purchased HP - accumulated write-downs
TA3200 Work in progress
A33001 Finished goods – cost
A33009 Finished goods – accumulated write-downs
TA3300 Finished goods
A34001 Goods for resale – cost
A34009 Goods for resale – accumulated write-downs
TA3400 Goods for resale
TA3001 Inventories

6.1.2. Income Statement

R68000 Cost of sales
One-off accounts
R74823 One-off – restructuring – reversal write-down inventories
R64824 One-off – restructuring – write-down inventories
R74843 One-off – other reversal write-down inventories
R64843 One-off – other write-down inventories

6.1.3. Statistical items

Details on expenses by nature
X90021 Purchase of wire rod
X90022 Inventory change of wire rod
X90028 Purchase of other raw materials
X90029 Inventory change of other raw materials
TX9002 Raw materials
X90031 Purchase of finished goods & goods for resale
X90032 Subcontracting of manufacturing activities
X90033 Purchase of machines by engineering entity
X90034 Purchase of half product
TX9003 Semi-finished products and goods for resale
X90040 Change in work-in-progress, finished goods and goods for resale
X90064 Write-down of inventories
X90065 Reversal write-down of inventories
Off-balance sheet commitments
X91407 Carrying amount of inventories secured for liabilities

6.2. Other disclosures

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For consolidation purposes, all entities carrying inventories bought from a subsidiary should specifically
disclose a detailed breakdown per interco supplier and per product group, while all entities having sold
inventory items to a subsidiary should disclose the percentage of gross earnings on sales per interco
customer and per product group.

6.2.1. BFC accounts

X90520 Standard gross margin inventory sales (%)

7. Example
Percentage of completion method
A construction contractor has a fixed price contract for 9,000 to build a bridge. The initial amount of
revenue agreed in the contract is 9,000. The contractor's initial estimate of contract costs is 8,000. It will
take 3 years to build the bridge.
By the end of year 1, the contractor's estimate of contract costs has increased to 8,050.
In year 2, the customer approves a variation resulting in an increase in contract revenue of 200 and
estimated additional contract costs of 150. At the end of year 2, costs incurred include 100 for standard
materials stored at the site to be used in year 3 to complete the project.
The contractor determines the stage of completion of the contract by calculating the proportion that
contract costs incurred for work performed to date bear to the latest estimated total contract costs. A
summary of the financial data during the construction period is as follows:
Year 1 Year 2 Year 3
Initial amount of revenue agreed in contract 9,000 9,000 9,000
Variation - 200 200
Total contract revenue 9,000 9,200 9,200
Contract costs incurred to date 2,093 6,168 8,200
Contract costs to complete 5,957 2,032 - -
Total estimated contract costs 8,050 8,200 8,200
Estimated profit 950 1,000 1,000
Stage of completion 26% 74% 100%
The stage of completion for year 2 (74%) is determined by excluding from contract costs incurred for
work performed to date the 100 of standard materials stored at the site for use in year 3.
The amounts of revenue, expenses and profit recognized in the income statement in the three years are
as follows:
To date Recognized in Recognized in
prior years current year
Year 1
Revenue (9,000 x .26) 2,340 2,340
Expenses (8,050 x .26) 2,093 2,093
Profit 247 247
Year 2
Revenue (9,000 x .74) 6,808 2,340 4,468
Expenses (8,200 x .74) 6,068 2,093 3,975
Profit 740 247 493
Year 3
Revenue (9,200 x 1.00) 9,200 6,808 2,392
Expenses 8,200 6,068 2,132
Profit 1,000 740 260

Chapter 7 – Inventories (revised December 2017) 17.