Prepared by

Coby Harmon
University of California, Santa Barbara
Westmont College
9-1
 Inventories: CHAPTER 9
Additional Valuation Issues
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe and apply the lower-of-cost-or-net realizable value
(LCNRV) rule.
2. Identify other inventory valuation issues:
a. Biological Assets and Agricultural Produce
b. Commodity Broker-Traders
c. Lump-sum purchase
d. Purchase Commitments

3. Explain how to report and analyze inventory

9-2
 PREVIEW OF CHAPTER 9

Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
9-3
 LEARNING OBJECTIVE 1
Inventory: An Overview Describe and apply the lower-
of-cost-or-net realizable value
rule.

 Inventories are asset:

 items held for sale in the ordinary course of business, or
 goods to be used in the production of goods to be sold
 inventory measured at Cost at acquisition.

 Companies must allocate the cost of all the goods available

for sale (or use) between the goods that were sold or used
(COGS/COGM) and those that are still on hand (inventory
balance), using the cost flow assumption: FIFO, Average or
Specific Identification.

 At the reporting date, company will measure the inventory at

Lower of Cost or Net Realizable Value (LCNRV).
9-4 LO 1
 Lower-of-Cost-or-Net Realizable Value
(LCNRV)

A company abandons the historical cost principle when the

future utility (revenue-producing ability) of the asset drops
below its original cost.

Net Realizable Value

Estimated selling price in the normal course of business less
 estimated costs to complete and

 estimated costs to make a sale.

9-5 LO 1
 Net Realizable Value

Illustration: Assume that Mander AG has unfinished inventory with

a cost of €950, a sales value of €1,000, estimated cost of
completion of €50, and estimated selling costs of €200. Mander’s
net realizable value is computed as follows.

ILLUSTRATION 9.1
Computation of Net Realizable Value

9-6 LO 1
 Net Realizable Value ILLUSTRATION 9.1
Computation of Net
Realizable Value

 Mander reports inventory on its balance sheet at €750.

 In its income statement, Mander reports a Loss on

Inventory Write-Down of €200 (€950 − €750).

9-7 LO 1
 Net Realizable Value

ILLUSTRATION 9.2
LCNRV Disclosures

9-8 LO 1
 Illustration of LCNRV
Jinn-Feng Foods computes its inventory
at LCNRV (amounts in thousands). ILLUSTRATION 9.3
Determining Final
Inventory Value

9-9 LO 1
 Methods of Applying LCNRV
Assume that Jinn-Feng Foods separates its food products
into two major groups, frozen and canned.

ILLUSTRATION 9.4
Alternative Applications of LCNRV

9-10 LO 1
 Methods of Applying LCNRV

 In most situations, companies price inventory on an item-

by-item basis.

 Tax rules in some countries require that companies use an

individual-item basis.

 Individual-item approach gives the lowest valuation for

statement of financial position purposes.

 Method should be applied consistently from one period to

another.

9-11 LO 1
 Recording NRV Instead of Cost

Illustration: Data for Ricardo SpA

Cost of goods sold (before adj. to NRV) €108,000
Ending inventory (cost) 82,000
Ending inventory (at NRV) 70,000

Loss Loss Due to Decline to NRV 12,000

Method Inventory (€82,000 - €70,000) 12,000

COGS Cost of Goods Sold 12,000

Method
Inventory 12,000

9-12 LO 1
 Recording NRV Instead of Cost

Partial Statement of Financial Position

Loss COGS
Method Method
Current assets:
Inventory € 70,000 € 70,000
Prepaids 20,000 20,000
Accounts receivable 350,000 350,000
Cash 100,000 100,000
Total current assets 540,000 540,000

9-13 LO 1
 Recording Net Realizable Value
Loss COGS
Income Statement Method Method
Sales € 200,000 € 200,000
Cost of goods sold 108,000 120,000
Gross profit 92,000 80,000
Operating expenses:
Selling 45,000 45,000
General and administrative 20,000 20,000
Total operating expenses 65,000 65,000
Other income and expense:
Loss due to decline of inventory to NRV 12,000 -
Interest income 5,000 5,000
Total other (7,000) 5,000
Income from operations 20,000 20,000
Income tax expense 6,000 6,000
Net income € 14,000 € 14,000
9-14
 Use of an Allowance

Instead of crediting the Inventory account for NRV adjustments,

companies generally use an allowance account, often referred to as
Allowance to Reduce Inventory to NRV.

Using an allowance account under the loss method, Ricardo SpA

makes the following entry to record the inventory write-down to
NRV.

Loss Due to Decline of Inventory to NRV 12,000

Allowance to Reduce Inventory to NRV 12,000
ILLUSTRATION 9-7

9-15 LO 1
 Use of an Allowance

Partial Statement of Financial Position

No
Allowance Allowance
Current assets:
Inventory € 70,000 € 82,000
Allowance to reduce inventory (12,000)
Inventory at NRV 70,000
Prepaids 20,000 20,000
Accounts receivable 350,000 350,000
Cash 100,000 100,000
Total current assets 540,000 540,000

9-16 LO 1
 LCNRV

Recovery of Inventory Loss

 Amount of write-down is reversed.

 Reversal limited to amount of original write-down.

Continuing the Ricardo example, assume the net realizable

value increases to €74,000 (an increase of €4,000). Ricardo
makes the following entry, using the loss method.

Allowance to Reduce Inventory to NRV 4,000

Recovery of Inventory Loss 4,000

9-17 LO 1
 Recovery of Inventory Loss

Allowance account is adjusted in subsequent periods, such

that inventory is reported at the LCNRV.
Illustration shows net realizable value evaluation for Vuko Company
and the effect of net realizable value adjustments on income.

ILLUSTRATION 9.8
Effect on Net Income of Adjusting
Inventory to Net Realizable Value

9-18 LO 1
 Evaluation of LCM Rule

LCNRV rule suffers some conceptual deficiencies:

1. A company recognizes decreases in the value of the asset
and the charge to expense in the period in which the loss in
utility occurs—not in the period of sale.
2. Application of the rule results in inconsistency because a
company may value the inventory at cost in one year and at
net realizable value in the next year.
3. LCNRV values the inventory in the statement of financial
position conservatively, but its effect on the income statement
may or may not be conservative. Net income for the year in
which a company takes the loss is definitely lower. Net
income of the subsequent period may be higher than normal if
the expected reductions in sales price do not materialize.
9-19 LO 1
 LCNRV
P9.1: Remmers SE manufactures desks. The 2019 catalog was in
effect through November 2019, and the 2020 catalog is effective as of
December 1, 2019. At December 31, 2019, the following finished
desks appear in the company’s inventory.

Finished Desks A B C D
2019 Catalog selling price € 450 € 480 € 900 € 1,050
FIFO cost per inventory list 12/31/19 470 450 830 960
Estimated cost to complete and sell 50 110 260 200
2020 catalog selling price 500 540 900 1,200

Instructions: At what amount should the four desks appear in the

company’s December 31, 2019, inventory, assuming that the company
has adopted a lower-of-FIFO-cost-or-net realizable value approach for
valuation of inventories on an individual-item basis?
9-20 LO 1
 LCNRV
Instructions: At what amount should the four desks appear in the
company’s December 31, 2019, inventory, assuming that the company
has adopted a lower-of-FIFO-cost-or-net realizable value approach for
valuation of inventories on an individual-item basis?

Finished Desks A B C D
2019 Catalog selling price € 450 € 480 € 900 € 1,050
FIFO cost per inventory list 12/31/19 470 450 830 960
Estimated cost to complete and sell 50 110 260 200
2020 catalog selling price 500 540 900 1,200

Net Realizable Value € 450 € 430 € 640 € 1,000

Lower-of-Cost-or-NRV 450 430 640 960

9-21 LO 1
 LEARNING OBJECTIVE 2
Valuation Bases Identify other inventory
valuation issues.

Net Realizable Value

Departure from LCNRV rule may be justified in situations when

 cost is difficult to determine,

 items are readily marketable at quoted market prices, and

 units of product are interchangeable.

Two common situations in which NRV is the general rule:

 Agricultural assets

 Commodities held by broker-traders.

9-22 LO 2
 Agricultural Assets
• Aset biologis: hewan atau tanaman hidup
Definisi • Produk agrikultur: produk yang dipanen dari aset biologis

1. Digunakan dalam produksi atau penyediaan

produk agrikultur;
Tanaman Produktif 2. Diharapkan untuk menghasilkan produk untuk
(Bearer Plants) jangka waktu lebih dari satu periode; dan
3. Kemungkinan kecil untuk dijual sebagai produk
agrikultur, kecuali penjualan produk sisa

1. Tanaman yang dibudidayakan untuk dipanen

Aset Tanaman “Bukan sebagai produk agrikultur.
Biologis Tanaman Produktif” 2. Tanaman yang dibudidayakan untuk
(Non-Bearer Plants) menghasilkan produk agrikultur sekaligus untuk
dipanen dan dijual sebagai produk agrikultur.
3. Tanaman semusim (annual crops).

1. Hewan yang dibudidayakan untuk dipanen

sebagai produk agrikultur.
2. Hewan yang dibudidayakan untuk menghasilkan
Hewan produk agrikultur sekaligus untuk dipanen dan
dijual sebagai produk agrikultur
3. Hewan yang dibudidayakan untuk menghasilkan
tambahan hewan
9-23
 Accounting of Agricultural Assets
Aset Biologis Produk Agrikultur Persediaan
Tanaman Produktif (PSAK 16, 48, 61) (PSAK 69) (PSAK 14)
(Bearer Plants) Pohon kelapa sawit Teladan buah segar Minyak kelapa sawit
Pohon karet Getah Produk olahan karet

Aset Biologis Produk Agrikultur Persediaan

(PSAK 69) (PSAK 69) (PSAK 14)
Tanaman “Bukan
Pohon kayu jati Pohon tebangan Papan kayu
Tanaman Produktif”
Pohon tebu Tebu panen Gula
(Non-Bearer Plants)
Pohon durian, pohon Buah petikan, pohon tebangan Buah olahan, papan kayu
kelapa,

Aset Biologis Produk Agrikultur Persediaan

(PSAK 69) (PSAK 69) (PSAK 14, 69)
Sapi Susu murni, daging sapi, anak Susu, daging sapi, anak
Hewan
sapi sapi
Domba Wol, daging potong, anak Pakaian, daging, anak
domba domba

Tanaman Produktif diatur menggunakan IAS 16 (PSAK 16: Aset Tetap) karena tanaman produktif
tidak terus menerus mengalami transformasi biologis. Hal ini disebabkan tanaman produktif akan
dewasa (matured) dan mulai menghasilkan produk agrikultur dalam jangka waktu yang lama
sampai tanaman tersebut tidak digunakan lagi (scrapped) pada akhir masa manfaat tanaman
tersebut. Tanaman produktif yang belum menghasilkan dicatat dan diukur sebagaimana
pencatatan dan penghitungan aset tetap yang dibangun sendiri. Adapun produk agrikultur dari
9-24 tanaman produktif dicatat dan diukur menggunakan IAS 41 (PSAK 69: Agrikultur)
 Accounting of Biological Assets
Pengakuan Pengukuran Keterangan

Tanaman Entitas mengakui aset • Tanaman belum siap • Untuk model biaya,
Produktif biologis atau produk menghasilkan: Akumulasi dilakukan impairment
agrikultur ketika: Biaya Perolehan test jika terdapat indikasi
• entitas • Tanaman siap impairment.
mengendalikan aset menghasilkan: Model • Untuk model revaluasi,
biologis sebagai Biaya & Model Revaluasi dicatat loss (other
akibat dari peristiwa expense) atau gain (OCI)
masa lalu; akibat perubahan FV
• besar kemungkinan
Tanaman • Pengukuran Awal • Entitas mencatat gain
manfaat ekonomik
Bukan  NRV: nilai wajar (FV) atau loss karena
masa depan yang
Tanaman dikurangi biaya untuk perubahan NRV aset
terkait dengan aset
Produktif menjual (cost to sell) biologis pada laba/rugi
biologis tersebut
 Jika nilai wajar tidak periode tahun berjalan
Hewan akan mengalir ke
dapat diukur secara
entitas; dan
andal, aset biologis
• nilai wajar atau
diukur sebesar biaya
biaya perolehan
perolehan
aset biologis dapat
• Pengukuran Selanjutnya
diukur secara andal
 NRV: nilai wajar (FV)
dikurangi biaya untuk
menjual (cost to sell)

Initial losses on biological assets typically arise when a biological asset is purchased. The cost of the
biological asset is often higher than the fair value less costs to sell, as the latter represents an exit
price, and transaction expenses therefore create a loss. Initial gains on biological assets arise when
9-25 new biological assets are generated – for example, when a calf or a piglet is born (PwC, 2009)
 Akuntansi Produk Agrikultur

• NRV: nilai wajar (fair value)

dikurangi biaya untuk menjual (cost
Pengukuran
to sell) pada titik panen.
• Pada saat produk agrikultur selesai
dipanen dan menjadi persediaan,
maka NRV akan menjadi cost
(biaya perolehan) persediaan.
Produk
Agrikultur

Pencatatan Keuntungan atau kerugian dari

Keuntungan pegakuan awal dicatat pada laba/rugi
& Kerugian periode tahun berjalan

9-26
 Hirarki Nilai Wajar

Apakah terdapat harga kuotasian di pasar aktif untuk aset atau

liabilitas yang identik?

Ya Tidak

Gunakan harga kuotasian

untuk mengukur nilai wajar Dapat diobservasi Tidak dapat diobservasi
– INPUT LEVEL 1

Harga kuotasian aset INPUT LEVEL 2

- Input selain harga kuotasian Gunakan teknik
biologis di pasar aktif. -Harga yang terbentuk di pasar penilaian – INPUT
Digunakan tanpa (harga paling terkini) ketika
LEVEL 3
penyesuaian . pasar aktif tidak ada.
- Harga pasar aset serupa Nilai kini arus kas
Umumnya untuk aset
yang disesuaikan. ekspektasian.
biologis yang dapat
dikonsumsi.

PSAK 69/SY
9-27
 Biaya untuk Menjual (Cost to Sell)

 Cost to sell: biaya inkremental yang diatribusikan

secara langsung untuk pelepasan aset. Contoh:
 komisi seperti upah juru lelang, dan
 pungutan-pungutan berdasarkan peraturan
perundang-undangan
 Tidak termasuk cost to sell:
 beban pembiayaan dan pajak penghasilan,
 biaya transportasi dan biaya lainnya yang diperlukan
untuk membawa aset ke pasar

PSAK 69/SY
9-28
 Biaya-biaya Terkait Aset Biologis
 Dalam memelihara dan merawat aset biologis Entitas
mengeluarkan biaya-biaya seperti biaya pemupukan,
biaya pakan ternak, dan lain-lain.
 Terdapat beberapa alternatif perlakuan biaya-biaya
tersebut, yaitu:
1. Semua biaya dibebankan (dicatat sebagai expense)
2. Semua biaya dikapitalisasi ke dalam aset biologis
3. Semua biaya dikapitalisasi ke dalam produk agrikultur
 Untuk tujuan pembelajaran, alternatif yang digunakan
adalah alternatif 1 (semua biaya dibebankan)

9-29
 Untuk tujuan pembelajaran, contoh soal yang
Contoh Soal dibahas adalah akuntansi tanaman bukan
produktif dan hewan yang menghasilkan produk
agrikultur (termasuk akuntansi produk agrikultur)

Illustration: Bancroft Dairy produces milk for sale to local cheese-

makers. Bancroft began operations on January 1, 2019, by purchasing
420 milking cows for €460,000. Bancroft provides the following
information related to the milking cows.

ILLUSTRATION 9.9 Agricultural Assets—Bancroft Dairy

9-30 LO 2
 Agricultural Accounting at NRV ILLUSTRATION 9.9
Agricultural Assets—
Bancroft Dairy

Bancroft makes the following entry to record the change in carrying

value of the milking cows.

Biological Asset (milking cows) 33,800

Unrealized Holding Gain or Loss—Income 33,800

9-31 LO 2
 Agricultural Accounting at NRV

Biological Asset (milking cows) 33,800

Unrealized Holding Gain or Loss—Income 33,800

Reported on the Statement of financial position as a non-

current asset at fair value less costs to sell (net realizable
value).

Reported as “Other income and expense” on the income

statement.

9-32 LO 2
 Agricultural Accounting at NRV

Illustration: Bancroft makes the following summary entry to record

the milk harvested for the month of January.

Inventory (milk) 36,000

Unrealized Holding Gain or Loss—Income 36,000

Assuming the milk harvested in January was sold to a local

cheese-maker for €38,500, Bancroft records the sale as follows.

Cash 38,500
Sales Revenue 38,500
Cost of Goods Sold 36,000
Inventory (milk) 36,000
9-33 LO 2
 Net Realizable Value

Commodity Broker-Traders
Generally measure their inventories at fair value less costs to
sell (NRV), with changes in NRV recognized in income in the
period of the change.

 Buy or sell commodities (such as harvested corn, wheat,

precious metals, heating oil).

 Primary purpose is to

► sell the commodities in the near term and

► generate a profit from fluctuations in price.

9-34 LO 2
 Valuation Bases

Relative Standalone Sales Value

Used when buying varying units in a single lump-sum purchase.

Illustration: Woodland Developers purchases land for $1 million

that it will subdivide into 400 lots. These lots are of different sizes
and shapes but can be roughly sorted into three groups graded A,
B, and C. As Woodland sells the lots, it apportions the purchase
cost of $1 million among the lots sold and the lots remaining on
hand. Calculate the cost of lots sold and gross profit.

9-35 LO 2
 Relative Standalone Sales Value ILLUSTRATION 9.10
Allocation of Costs,
Using Relative
Standalone Sales Value

ILLUSTRATION 9.11
Determination of Gross Profit,
Using Relative Standalone Sales Value

9-36 LO 2
 Valuation Bases

Purchase Commitments—A Special Problem

 Generally seller retains title to the merchandise.

 Buyer recognizes no asset or liability.

 If material, the buyer should disclose contract details in

note in the financial statements.

 If the contract price is greater than the market price,

and the buyer expects that losses will occur when the
purchase is effected, the buyer should recognize a
liability and corresponding loss in the period during which
such declines in market prices take place.

9-37 LO 2
 Purchase Commitments

Illustration: Tgl 1 Desember 2019 Toko HoneyFla Bakery membuat

komitmen kepada PT Bagirasa untuk membeli 100 kg terigu dengan harga
@Rp10.000 pada tanggal 20 April 2020. Pada akhir periode 31 Desember
2019 diketahui harga pasar terigu saat itu turun menjadi Rp9.000,-.
Ada penurunan sebesar 100 kg (10.000-9.000)  Rp100.000,-

Unrealized Holding Gain or Loss—Income 100,000

Purchase Commitment Liability 100,000

Other expenses and losses in the Income statement.

Current liabilities on the balance sheet.

9-38
 Purchase Commitments
Situasi 1: apabila pada saat transaksi pembelian tanggal 20 April 2020,
diketahui harga pasar adalah Rp9.000 (sesuai dengan estimasi tanggal
31 Des 2019), maka jurnal tanggal 20 April 2020:

Purchases (Inventory) 900,000

Purchase Commitment Liability 100,000
Cash 1,000,000

Situasi 2: apabila pada saat transaksi pembelian tanggal 20 April 2020,

diketahui harga pasar adalah Rp9.500, maka jurnal tanggal 20 April 2020:

Purchases (Inventory) 950,000

Purchase Commitment Liability 100,000
Unrealized Holding Gain or Loss—Income 50,000
Cash 1,000,000
9-39
 Purchase Commitments
Situasi 3: apabila pada saat transaksi pembelian tanggal 20 April 2020,
diketahui harga pasar adalah Rp8.500, maka jurnal tanggal 20 April 2020:

Purchases (Inventory) 850,000

Purchase Commitment Liability 100,000
Unrealized Holding Gain or Loss—Income 50,000
Cash 1,000,000

9-40
 LEARNING OBJECTIVE 3
Presentation Explain how to report
inventory.

Presentation of Inventories
Accounting standards require disclosure of:
1) Accounting policies adopted in measuring inventories,
including the cost formula used (weighted-average, FIFO).

2) Total carrying amount of inventories and the carrying

amount in classifications (merchandise, production supplies,
raw materials, work in progress, and finished goods).

3) Carrying amount of inventories carried at fair value less

costs to sell.

4) Amount of inventories recognized as an expense during the

period.
9-41 LO 5
 Presentation

Presentation of Inventories
Accounting standards require disclosure of:
5) Amount of any write-down of inventories recognized as
an expense in the period and the amount of any reversal
of write-downs recognized as a reduction of expense in
the period.

6) Circumstances or events that led to the reversal of a

write-down of inventories.

7) Carrying amount of inventories pledged as security for

liabilities, if any.

9-42 LO 5