P.Ariyasena Chief Accountant Ministry of Foreign Employment Promotion and Welfare

Introduction The objective of this Standard is to prescribe the accounting treatment for inventories This standard provides guidance on the determination of cost and its subsequent recognition as an expense including any write- down to NRV. It also provide cost formula that are used to assign costs to inventories This standard is almost identical to SLAS 5 Inventories

Scope of the Standard  This standard shall apply under accrual basis of accounting for all inventories except  Working progress under construction contracts including directly related service contracts (IPSAS-11)  Financial Instruments (IPSAS 15 & SLAS 44 & 45)  Biological assets related to agriculture activity and agriculture produce at the point of harvest.(No SPSAS, national or international standard apply)  WIP of services to be provided for no or nominal payment Cont…

Scope of the Standard  Also this standard does not apply for  Producers of agricultural and forest products after harvest and minerals and mineral products to the extent that they are measured at NRV  Inventories held by commodity brokers who measure their inventories at faire value less cost to sale.  Applies to all public sector entities other than GBEs

Important Definitions Inventories are assets  Materials or supplies to be consumed for production  Materials or supplies to be consumed in rendering of services  Items held for sale or distribution in the ordinary course of operation  In the process of production for sale or distribution Exchange Transactions Transactions which one entity receives assets or services, or has liabilities extinguished,and directly gives approximately equal value to another entity Non-Exchange Transactions Transactions that are not exchange transaction. An entity receives value from another entity without directly giving approximately equal value in exchange.

Important Definitions Net Realizable Value (NRV) NRV is the estimated selling price in the ordinary course of operations less the estimated costs of completion and estimated costs necessary to make the sale, exchange or distribution. Fair Value Fair Value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Inventories in the Public Sector Entity  Ammunitions  Consumable stores  Maintenance materials  Spare parts for plants & equipment  Strategic stockpiles (Ex energy reserves)  Stock of unissued currency  Stamps  WIPs of Education/Training course materials & client services Ex Auditing services  Land or property held for sale

Measurement of Inventories  Usually inventories shall be measured at the lower of Cost and Net Realizable Value(NRV)  However if inventories are acquired through a non exchange transaction, their cost shall be measured at fair value as at the date of acquisition  Inventories shall be measured at the lower of cost and current replacement cost where there are held for  Distribution of no charge or for a nominal charge  Consumption in the production process of goods to be distributed at no charge or for a nominal charge.

Cost of Inventories The cost of inventories shall comprise All costs of purchase Costs of conversion Other costs incurred in bringing the inventories to their present location and condition

Cost of Purchases Cost of purchases of inventories comprise Purchase price Import duties Other taxes (Not recoverable) Transport and handling costs Less Trade discounts or rebates or other similar items deducted in determining the cost of purchase

Cost of Conversion  The cost of conversion of inventories include costs directly related to the unit of production These costs are incurred in a manufacturing environment  Direct labor cost  Fixed production overhead (allocation)  Other conversion costs incurred in bringing them to their present location and condition

Other Costs Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to the present condition and location Example  Non Production overheads  Cost of designing products for specific customer  Borrowing Costs identifies limited circumstances where borrowing costs are included in the cost of inventories

Other Costs Following costs excluded from the cost of Inventories and recognized as expense in the period in which they are incurred Abnormal amounts of waste material, labor or other production costs. Storage cost, unless those costs are necessary in the production process before a further production stage Administrative overheads that do not contribute to bringing inventories to their present location and condition Selling costs

Cost of Inventories of a Service Provider Cost of Inventories of a Service Provider consist 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. Also cost of inventories does not include surplus margin or non attributable overheads.

Cost of Agricultural produce harvested from Biological Assets National or International Accounting Standards apply Inventories harvested from biological assets may be measured at their fair value less estimated point of sales costs at the point of harvest.

Techniques for Measurement of Cost Two method are recommended  Standard cost method Standard costs take into account normal levels of materials and supplies, labor, efficiency and capacity utilization  Retail method ( If the inventories transferred to the entity by means of a non exchange transaction, then the cost of inventory measure its fair value Ex:An international aid agency donate medical supplies to a public hospital.)

Cost Formulas The cost of inventories of items that are not interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs Other than those dealt with above cost of inventories shall be assigned by using FIFO- First In,First Out or WAP- Weighted Average Cost formulas

Net Realizable Value (NRV) The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete or selling price declined. The practice of written inventories down bellow cost to NRV is consistent with view that assets are not be carried in excess expected to be realized from their sale.

Cost Formula for NRV. NRV = Estimated selling price XXXX Less: Estimated cost of completion (XXX) Less: Estimated cost to make sale (XXX) Inventories are usually written down to NRV on an item by item basis. However it may be appropriate to group similar or related items. It is not appropriate to write –down inventories based on a classification of inventory

Distribution of Goods at No Charge or for a Nominal Charge If the government has determined to distribute certain goods at no charge or for a nominal amount, then the inventory is valued at their fair value as at the date of acquisition.

Recognition as an Expense When inventories are sold, exchanged or distributed, the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognized.

Disclosure  The Financial Statements shall disclose  The accounting policy adopted in measuring inventories & cost formula  The total carrying amount of inventories with a classification  The carrying amount of inventories carried at fair value less cost to sale  The amount of inventories recognized as an expense during the year  Amount of any write- down of inventories as an expense in the period  The amount of any reversal of any write – down  The carrying value of inventories pledged as security for liabilities.

Effective date Beginning on or after 01 January 2008

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