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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://frs102.com/members/premium-toolkit/section-13/” type=”big” color=”red”] Return to Section 13 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Example 1: Spare parts
A manufacturing company holds a significant stock of critical spare parts for its production equipment. Given that these spare parts are specific to the production equipment itself, and given that they will be used over more than one period, these assets are classified as PPE and depreciated over there expected useful life. In reality on transition the value if previously included in inventory should equal the cost to be transferred to PPE. A similar example would be where plastic boxes are used for carrying and distributing the main products which are used again and again and are not provided to customers on a long term basis. These are classified as fixed assets as opposed to spare parts.
Example 2: inventories held for distribution
Company A holds stock of promotional material for entities main product; widgets. The cost of these materials was CU5,000 and none have been used since purchase. At year end the company would be required to recognise this as stock in the balance sheet.
Example 3: Cost of inventory – rebates
Company A received CU200,000 in rebates for purchases of particular products from a supplier. The company purchased 300,000 of the products from the supplier over the year and 20,000 of these products remain in stock. The total purchase cost of the stock before rebates is CU20 per unit. The level of rebates received to be absorbed in inventory is as follows:
CU200,000 / 300,000 units = CU1.50
Example 3A: Purchase with unusual credit termsTherefore for every unit purchased, CU1.50 of a rebate was received. The value to be absorbed in stock at the year-end is CU30,000 (20,000 * CU1.50). Stock should be valued at CU370,000 ((CU20-CU1.50)*20,000).
Company A purchased goods worth CU50,000 with unusual credit terms on 01/12/13. The credit provided is for a period up to 31/12/15. The normal cash price for these goods would be CU35,000. The difference of CU15,000 is determined to be a financing transaction and should be accounted for under Section 11. The effective interest rate is calculated at 18.62% as per below. The effective interest rate is determined so as to write the deemed interest into the P&L over the life of the transaction. The effective interest rate is determined through trial and error or through the use of an excel calculation.
For the purchasing company the journals to post are:
|
|
CU |
CU |
|
Dr Inventory |
50,000 |
|
|
Cr Trade Creditors |
|
50,000 |
Being journal to reflect purchase of stock
|
|
CU |
CU |
|
Dr Trade Creditors |
15,000 |
|
|
Cr Inventory |
|
15,000 |
Being journal to reflect the deemed financing element of the sale so as to show the correct amortised cost
|
|
CU |
CU |
|
Dr Finance Expense in P&L (so that the carrying amount is now CU35,536) |
536 |
|
|
Cr Trade Creditors |
|
536 |
Being journal reflect the deemed interest expense in the profit and loss for the year for one month. The same type of journal is posted for the other two years.
Example 4: Allocation of overheads to production with overheads higher than normal:
Company A operate a construction timber company constructing wooden material for site boundaries. Details are as follows:
Normal level of activity is 100,000 machine hours per annum
Full capacity of the plant is 120,000 machine hours per annum
Actual machine hours incurred for the year was 110,000 hours
Total fixed overheads were CU2,000,000
Opening stock was 100,000 units and closing stock is 125,000 units.
Total produced in the year was 290,000 units and total sales in the year was CU7,500,000.
Using the above example the production overhead to be allocated to inventory is:
Production overheads/machine hours for normal capacity = CU2,000,000 / 100,000 = CU20
As stated in 13.9, overhead should be allocated on normal levels of activity which would be CU20 per hour in this example. Therefore, the total costs if this were allocated to all units produced would be CU5,800,000. As this is well in excess of the actual fixed overhead costs incurred, the entity would need to absorb the cost on the actual level of activity to ensure that stock is not overstated. i.e. 2,000,000 / 110,000 = CU18.18. The amount to be allocated to inventory at year end is therefore 125,000 units * CU18.18 = CU2,272,500.
Example 5: Impairments
Company A has inventory of CU100,000 at the year-end. In second month following year end it emerged that the market for the product slumped and as a result the selling price decreased significantly. At the time of preparing the financial statements on 1 February the entity should use the post year end selling price as a basis for assessing impairments. The company has a stock turn of 2 months. Given that the decline in the market has indicated an impairment, an impairment will be required to be booked in the year end accounts. The value of the impairment should equal the selling price after year end less the cost to sell and complete. Given that in the first month after year end there was no issues, CU50,000 of the inventory would not have to be written down as it was sold above cost (CU50,000 as there is two months of stock on hand at year end) however the remaining CU50,000 will have to be impaired as this will be sold at the new lower price.
If we take this example and assume the selling price decreased in the second month of the year as above, but half way through that month it emerged that there was no longer a market for the product due to a new version being introduced. Therefore at the year-end, a provision would be made in full for the last part of the second month assuming there was no scrap value.
Example 6: Raw material less than cost but finished good not
Company A produces cattle feed. The company uses a number of raw materials to produce this, one of these being barley. At the year end the purchase cost of barley per tonne was CU10 in excess of its recoverable amount (selling price less cost to sell). However, the cattle meal which incorporates this barley cost is selling well in excess of the total cost to produce the finished good. On this basis no provision is required to be booked.
Example 7: Post balance sheet events and requirement for impairment
Company A holds stock of CU500,000 at year end. Subsequent to the year-end there was a fire in the factory premises which destroyed the entire inventory. Although this means the CU500,000 stock is no longer saleable, this is seen as a non-adjusting post balance sheet event as the condition did not exist at the year-end date. This is made clear in Section 32.5 (b) Events after the reporting period.
Example 8: Post balance sheet events and requirement for impairment
A company has inventory of product X at year end worth CU500,000. Subsequent to year end the company made a decision to cease production of product X and instead sell a new updated product which is better than product X and does the same job. This has resulted in the full CU500,000 being irrecoverable. An assessment has to be made as to whether an impairment is required. In deciding whether a write down is required, one would have to assess if the company knew at year end that this change was going to happen even though it was not announced formally or if this decision was made post year end. If it was known pre year end, then an impairment is required to be booked.
Example 9: Derecognition of inventory
Company A delivered consignment stock to Company B’s premises. Company B uses this stock in the production process. Title does not transfer until Company B takes the stock from the warehouse. Company A could not recognise a sale on the transfer as the risk and rewards of ownership has not passed to Company B. Therefore Company A could not derecognise this inventory. Only when Company B takes some of the inventory from the consignment stock and once Company A is informed of this can revenue be recognised by Company A and therefore inventory can be derecognised by Company A and recognised as inventory by Company B.
Example 10: Reclassification of spare parts from inventory to PPE
Company A, has a significant value of spare parts for the production equipment. Under old GAAP these spare parts were treated as inventory. The total value of these spare parts at the date of transition was CU500,000. At the date of transition, the company determines the useful life of the spare parts to be 10 years from the date of transition and the residual value is nil. Assume the date of transition is 1 January 2014 and the tax rate is 10%. The transition adjustment required on 1 January 2014 is:
|
|
CU |
CU |
|
Dr PPE |
500,000 |
|
|
Cr Inventory |
|
500,000 |
In the 31/12/14 i.e. the comparative year for FRS 102, a journal adjustment would be required to account for the depreciation and the deferred tax impact. Note from a tax perspective the depreciation will be allowed as a deduction, therefore after transition there will be no deferred tax effect. Assume deferred tax is recognised on transition for the tax deduction not allowed in the comparative year but will be allowed as part of transition adjustments in the tax computation going forward over 5 years. The journals required are:
|
|
CU |
CU |
|
Dr Profit and Loss – Depreciation (CU500,000 / 10yrs) |
50,000 |
|
|
Cr PPE – Spare Parts
|
|
50,000 |
|
Dr Balance Sheet – Deferred Tax (CU50,000 *10%) |
5,000 |
|
|
Credit Profit and Loss – Deferred Tax |
|
5,000 |
|
|
|
|
Journals required in the 31 December 2015 year end assuming the above journals were posted to profit and loss reserves etc.
Assuming no movement has occurred no journals are required on top of what has already been posted to reserves. Even if there was movement in 2015 no deferred tax journal will be required for that movement as it would be included in the 2015 tax computation. The deferred tax of CU5,000 will be recovered over the next 5 years under the tax transition adjustments as assumed in the question (i.e. a journal to derecognise CU1,000 (CU5,000/5 years) of this deferred tax asset required in the 2015 year and for the four years following this).
Example 11 – Extract from an accounting policy note and required inventory disclosures
Stocks
Stocks comprise consumable items and goods held for resale. Stocks are stated at the lower of cost and net realisable value. Cost is calculated on a first in, first out basis and includes invoice price, import duties and transportation costs. Net realisable value comprises the actual or estimated selling price less all further costs to completion or to be incurred in marketing, selling and distribution.
At the end of each reporting period stocks are assessed for impairment. If an item of stock is impaired, the identified inventory is reduced to its selling price less costs to complete and sell and an impairment charge is recognised in the profit and loss account. Where a reversal of the impairment is recognised the impairment charge is reversed, up to the original impairment loss, and is recognised as a credit in the profit and loss account.
Extract from notes to the financial statements
- Stocks
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Raw material |
33,724 |
42,108 |
|
Precast concrete products |
71,769 |
84,968 |
|
Work in progress |
674,216 |
345,090 |
|
|
|
|
|
|
779,709 |
472,166 |
The net replacement cost of stocks is not expected to be materially different from that shown above.
Stocks recognised as an expense in the period were CU2,000,000. Stocks are stated after provisions for impairment of CU32,000 (2014: CU28,000).
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