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Overview

IPSAS 12 is based on IAS 2 Inventories (Revised 2003).


IPSAS 12 prescribes the accounting treatment for most kinds of inventories. This standard  requires inventories to be measured at the lower of cost and net realizable value (NRV) and provides guidance on the acceptable cost formulas, including specific identification, first-in first-out (FIFO) and weighted average cost.


IPSAS 12 was reissued in December 2006 and applies to annual periods beginning on or after 1 January 2008.



History of IPSAS 12










Effective date

Annual periods beginning on or after 1 January 2008.


Full text

Refer to IFAC website here


Summary of IPSAS 12 Inventories

Objective


IPSAS 12 is prescribes the accounting treatment for most kinds of inventories. The standard provides guidance for determining the cost of inventories and for subsequently recognizing an expense, including any write-down to net realizable value and it provides guidance on the acceptable cost formulas for the determination of cost.


Scope

This standard should be applied by entities that prepare and present financial statement under the accrual basis of accounting [IPSAS 12.2]. IPSAS 12 applies to all public sector entities other than GBEs [IPSAS 12.4].


Following items are explicitly excluded from IPSAS 12 [IPSAS 12.2]:

















The following items are within the scope IPSAS 12, but the measurement principles do not apply to inventories held by [IPSAS 12.3]:

• producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value (above or below cost) in accordance with well-established practices in those industries. When such inventories are measured at net realizable value, changes in that value are recognized in surplus or deficit in the period of the change.

• commodity brokers and dealers who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change.


Main principle of IPSAS 12

Inventories are required to be stated at the lower of cost and net realisable value (NRV), except in some very specific cases when they will be valued at fair value (FV) at the acquisition date or at replacement cost [IAS 12.15].


Inventories

Inventories are assets [IAS 12.9]:

(a) in the form of materials or supplies to be consumed in the production process or (b) in the rendering of services.

(b) held for sale in the ordinary course of operations;

(c) in the process of production for such sale;


Measurement of inventories

Inventories are required to be stated at the lower of cost and net realisable value (NRV), except when [IAS 12.15]:

• Acquired through a non-exchange transaction: measurement at fair value (FV) at the date of acquisition

• Held for distribution at no or for a nominal charge or held for the production of these goods: measurement at lower of cost or replacement cost


Cost should include all [IPSAS 12.18]:

• costs of purchase (including taxes, transport, and handling) net of trade discounts received

• costs of conversion (including fixed and variable manufacturing overheads) and

• other costs incurred in bringing the inventories to their present location and condition


IPSAS 5 Borrowing Costs identifies some limited circumstances where borrowing costs (interest) can be included in the cost of inventories that meet the definition of a qualifying asset [IPSAS 12.26 and IPSAS 5.13].


Cost of inventory specifically excludes [IPSAS 12.25 and 12.27]:

• abnormal waste

• storage costs

• administrative overheads unrelated to production

• selling costs

• foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency

• interest cost when inventories are purchased with deferred settlement terms.


IPSAS 12 allows the use the standard cost method and the retail method for the measurement of cost of inventories, if the result approximate actual cost [IPSAS 12.30].

Inventory items that are not interchangeable, cost shall be allocated based on specific identification of individual cost [IPSAS 12.32].

FIFO or weighted average cost formulas are allowed for items that are interchangeable [IPSAS 12.35]. The LIFO formula is not allowed.

The same cost formula will applied for all items of inventory having the same nature and use for the entity [IPSAS12.35]. Different cost formulas may be justified for inventories that have different characteristics [IPSAS 12.35].


Goods distributed at no charge or for a nominal amount


A public sector entity may hold inventories that embody future economic benefits or service potential that will be distributed at no or at a nominal charge. As a consequence its future economic benefit or service potential is do not reflect the future potential to generate future cash inflows for the entity. In this case these goods are valued at replacement or estimated replacement cost, depending on the fact that the future economic benefit or service potential can be acquired or not in the market [IPSAS 12.43].


Write-down to net realizable value

NRV is the estimated selling price in the ordinary course of operations, less the estimated cost of completion and the estimated costs necessary to make the sale, exchange or distribution [IPSAS 12.9]. Any write-down or inventory losses are recognized as an expense in the period they occur. Any reversal of write-down should be recognized as a reduction of the inventories recognized as an expense in the Statement of Financial Performance (“Income statement”) in the period in which the reversal occurs [IPSAS 12.44].


Expense recognition

• IPSAS 9 Revenue from Exchange Transactions addresses revenue recognition for exchange transactions and events. When inventories are sold, exchanged, or distributed and the revenue related to the transaction is recognized, the carrying amount of those inventories is recognized as an expense (“cost-of-goods-sold”) [IPSAS 12.44]

• If no revenue is recognized (e.g. items are distributed at no charge) the cost of the inventory is expensed when distributed or when the service is delivered [IPSAS 12.44]

• Any write-down or inventory losses are recognized as an expense in the period they occur. [IPSAS 12.44]


Disclosures

The following disclosures are required by IPSAS 12 [IPSAS 12.47]:

• accounting policies for inventories, including the cost formula applied

• carrying amount using an appropriate classification for the entity (e.g. supplies, materials, work in progress, and finished goods)

• carrying amount of any inventories carried at fair value less costs to sell

• amount of inventories recognized as an expense (Cost of goods sold)

• amount of any write-down of inventories recognized as an expense

• amount of any reversal of a write-down and the circumstances that led to such reversal

• carrying amount of inventories pledged as security for liabilities


Presentation of the inventories recognized as expense

If an entity present its expenses by nature (materials, labour, etc) in the Statement of Financial Performance (Income Statements) rather than by function (cost of goods sold, selling expense, etc), an entity is not required to present the amount of inventories recognized as an expense (“Cost of Goods Sold”-line). Alternatively, IPSAS 12 allows to disclose the operating costs by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period [IPSAS 12.50]. This presentation is consistent with IPSAS 1 Presentation of Financial Statements, which allows presentation of expenses by function or by nature.




July 2001

Issuance of IPSAS 12: Inventories

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Revision of IPSAS 12

1 January 2008

Effective date of IPSAS 12

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Amendments from IPSAS 27, Agriculture (issued in December 2009)

IPSAS 12  Inventories

Item

Covered by

Construction contracts: Work-in-progress

IPSAS 11 Construction contracts

Financial Instruments

IPSAS 28 Financial Instruments: Presentation


IPSAS 29 Financial Instruments: Recognition and measurement

Biological assets

IPSAS 27 Agriculture

Work-in-progress of services to be provided for no or nominal consideration in retrun from the recipients