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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ 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″ custom_padding_tablet=”0px||0px|” custom_padding_last_edited=”on|desktop” prev_background_color=”#ffffff” next_background_color=”#000000″][et_pb_row][et_pb_column type=”4_4″][et_pb_toggle admin_label=”Index” _builder_version=”3.0.106″ title=”Index” open=”off”]Contents
13.1.1 Extract from FRS 102 – Section 13.1 – 13.3.
13.2 Measurement of inventory.
13.2.1 Extract from FRS 102 – Section 13.4-13.4A.
13.2.2.1 Inventory other than inventory held at or nominal consideration.
13.2.2.2 Inventory held at no or nominal consideration.
13.2.2.3 Definition of no or nominal consideration.
13.3.1 Extract from FRS 102 – Section 13.5-13.7.
13.3.2.1.1. Irrevocable taxes and taxes incurred only an extraction from warehouses.
13.3.2.2 Stock purchased on beyond normal credit terms.
13.3.2.4 Non-exchange transaction.
13.4 Cost of conversion – production overheads.
13.4.1 Extract from FRS 102 – Section 13.8-13.11 and 13.14-13.15.
13.4.2.1 Cost to be recognised in inventory – production overheads.
13.4.2.1.2 Illustration of allocation of overheads to production – normal capacity.
13.4.2.2 Joint products and by-products.
13.5 Cost excluded from inventories.
13.5.1 Extract from FRS 102 – Section 13.13.
13.5.2.5 General and administrative overheads.
13.6 Cost measurement techniques.
13.6.1 Extract from FRS 102 – Section 13.16-13.18.
13.6.2.4 Most recent purchase price.
13.6.2.5.1 Non-interchangeable goods.
13.6.2.5.2 Interchangeable goods.
13.6.2.5.4 Requirements for consistency.
13.7 Impairment of inventories.
13.7.1 Extract from FRS 102 – Section 13.19.
13.7.2.2 Assessing the selling price less cost to sell
13.7.2.3 Post period end events and impairments.
13.7.2.4 Reversal of impairments.
13.8 Derecognition as an asset
13.8.1 Extract from FRS 102 – Section 13.20-13.21.
13.9.1 Extract from FRS 102 – Section 13.22.
13.9.2.3 Notes to the financial statement.
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13.3 Cost of purchase
13.3.1 Extract from FRS 102 – Section 13.5-13.7,/span>
13.5 An entity shall include in the cost of inventories all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
13.5A Where inventories are acquired through a non-exchange transaction, their cost shall be measured at their fair value as at the date of acquisition. For public benefit entities and entities within a public benefit entity group, this requirement only applies to inventories that are recognised as a result of the requirements for incoming resources from non-exchange transactions as prescribed in Section 34 Specialised Activities.
13.6 The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), 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.
13.7 An entity may purchase inventories on deferred settlement terms. In some cases, the arrangement effectively contains an unstated financing element, for example, a difference between the purchase price for normal credit terms and the deferred settlement amount. In these cases, the difference is recognised as interest expense over the period of the financing and is not added to the cost of the inventories unless the inventory is a qualifying asset (see Section 25 Borrowing Costs) and the entity adopts a policy of capitalisation of borrowing costs.
13.3.2 OmniPro comment
13.3.2.1 Definition of cost
As per section 13.5 of FRS 102 the purchase price of inventories is all costs of purchase, conversion and other costs incurred in bringing the inventories to their present locations and condition. These costs include:
- Purchase price (if sold beyond normal credit terms then under section 13.7 of FRS 102 the present valued amount should be taken – see 13.2.2.2);
- Import duties and other taxes other than recoverable tax (see 13.3.2.1.1)
- Transportation and handling costs (see 13.5.2.4)
- And other costs directly attributable to the acquisition of the materials (see 13.5.2.5 and 13.4.2)
- Less rebates or discounts received. (see 13.3.2.1.2)
13.3.2.1.1. Irrevocable taxes and taxes incurred only an extraction from warehouses
In relation to the inclusion of irrecoverable taxes in inventory, consideration should be given as to when they should be included in the cost where they are held in warehouses and the tax is not payable until they are taken out of this warehouse. In such situations, the tax should not be absorbed in the cost of stock until the goods are taken from the warehouse as it is at this point that the tax becomes payable. An example of such a situation would be stock of wine held in a customs free zone.
13.3.2.1.2 Rebates
In relation to the absorption of rebates, the amount of rebates is allocated on a per unit basis to determine the value to be absorbed into stock. Note rebates or any other types of discount are not absorbed in stock until the likelihood of receipt of the rebate is certain i.e. it meets the definition of an asset under Section 21-Provisions.
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 |
Therefore 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).
13.3.2.2 Stock purchased on beyond normal credit terms
Section 13.7 of FRS 102 provides the accounting treatment where stock is purchased on deferred settlement terms. Where stock is purchased on deferred payment terms which are beyond normal credit terms, there is deemed to be a financing element included in the purchase cost. In this case the finance cost element (i.e the difference between the price charged and the cash price) of the item purchased is determined by taken the purchase price less the price that would have been paid if this was paid for straight away. Where this cannot be determined then a market rate of interest would be used in order to determine a cash price i.e. a rate a third party i.e. a bank would charge for the extended credit. The finance cost is recognised in the profit and loss ( or in an asset if permitted) over the period of the financing (i.e. the cash price is only recognised in inventory initially)
Example 3A: Purchase with unusual credit terms
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.
13.3.2.3 Borrowing costs
Borrowing costs can be absorbed into stock but in limited circumstances. Where the borrowing costs are incurred on qualifying assets as defined in Section 25.2 of FRS 102, (an asset that takes a substantial period of time to get ready for use or sale) then the costs can be absorbed. An example of where this could occur is in the production of whiskey which takes a significant time to mature. Another example would be industries where a small volume of products are produced but take considerable time to produce.
13.3.2.4 Non-exchange transaction
As per section 13.5A of FRS 102, where inventories are acquired through a non-exchange transaction the cost is measured at their fair value at the date of acquisition (separate rules apply to public benefit entities – see section 34 of FRS 102). A non-exchange transaction is defined in Appendix I of FRS 102 as a transaction whereby an entity receives value from another entity without directly giving approximately equal value in exchange, or gives value without directly receiving approximately equal value in exchange.
Example 3B: Non-exchange transaction
Entity A acquired inventory for CU1 from a related company which had a fair value of CU100,000. In accordance with section 13.5A of FRS 102, this is a non-exchange transaction (as CU1 has been paid for an inventory item worth CU100,000 – hence no equal value as not carried out at arm’s length) and following journals would be required:
Journals where the entity selling the inventory for CU1 is not the parent:
| CU | CU | |
| Dr Inventory | 100,000 | |
| Cr Related party trade balance | 1 | |
| Cr Gain in profit and loss | 99,999 |
Being journal to account for non-exchange transaction
Journals where the entity selling the inventory for CU1 is the parent:
| CU | CU | |
| Dr Inventory | 100,000 | |
| Cr Related party loan | 1 | |
| Cr Capital contribution | 99,999 |
Being journal to account for non-exchange transaction.
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Examples
Example 2: Inventories held for distribution.
Example 3: Cost of inventory – rebates.
Example 3A: Purchase with unusual credit terms.
Example 3B: Non-exchange transaction.
Example 4: Allocation of overheads to production with overheads higher than normal:
Example 6: Raw material less than cost but finished good not
Example 7: Post balance sheet events and requirement for impairment
Example 8: Post balance sheet events and requirement for impairment
Example 9: Derecognition of inventory.
Example 10: Extract from an accounting policy note and required inventory disclosures.
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