Depresión

pUK13.1 Whilst SSAP 9 refers to ‘net realisable value’ rather than ‘estimated selling price less costs to complete and sell’ this is a difference only in terminology. The definition of net realisable value sets out that it is the selling price less costs to complete and marketing, selling and distribution costs yet to be incurred.

pUK13.2 The use of LIFO is not prohibited but is extremely rare in practice.

pUK13.3 There are no special measurement rules for agricultural or mineral inventories.

© 2013 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

13 Inventories |

FRS 102

Section 13

13.1 Inventories are assets:

(a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. [FRS102.13.1]

13.2 This section applies to all inventories, except:

(a) work in progress arising under construction contracts, including directly related service contracts – see Section 23 Revenue;

(b) financial instruments – see Section 11 Basic financial instruments and Section 12 Other financial instruments issues; (c) biological assets related to agricultural activity and agricultural produce at the point of harvest – see Section 34

Specialised activities. [FRS102.13.2]

13.3 This section does not apply to the measurement of inventories that are measured at fair value less costs to sell through profit or loss at each reporting date. [FRS102.13.3]

Measurement of inventories

13.4 Inventories are measured at the lower of cost and estimated selling price less costs to complete and sell. [FRS102.13.4] When inventories are held for distribution (for example, items to be distributed to beneficiaries by public benefit entities and promotional materials) they are measured at cost less loss of service potential. [FRS102.13.4A, FRS102.A4.36,37]

13.5 The cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. [FRS102.13.5] If acquired through a non-exchange transaction, inventories are measured at acquisition date fair value. For public benefit entities and entities within a public benefit entity group, this applies only when incoming resources are recognised (see Section 34).

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. [FRS102.13.6]

13.7 When inventories are purchased on deferred settlement terms, any finance element is recognised as interest expense over the period of financing. It is not part of 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. [FRS102.13.7] 13.8 The costs of conversion of inventories include costs directly related to the units of production, such as direct labour.

They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain

relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and equipment, and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour. [FRS102.13.8]

13.9 Other costs are included only to the extent they are incurred in bringing the inventories to their present location and condition. [FRS102.13.11]

13.10 An entity may hedge the fixed interest rate risk of a financial instrument held at amortised cost or the commodity price risk in a firm commitment or of a commodity held. As further explained in paragraph 12.16(b) of this publication, in certain circumstances the change in the fair value of the hedging instrument will adjust the carrying amount of the related inventories. [FRS102.13.12]

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| Cutting through UK GAAP

vs EU-IFRS

Applicable standard: IAS 2

IFRS13.1 IAS 2 refers to ‘net realisable value’ rather than ‘estimated selling price less costs to complete and sell’. However, the way that net realisable value is defined in IAS 2.6 means this is not a measurement difference in practice. IFRS13.2 IAS 38.69 (c) requires that expenditure on advertising and promotional activities (including mail order catalogues) are

expensed when the benefit of those goods or services is available to the entity.

IFRS13.3 The inclusion of borrowing costs in the cost of inventories is required in certain circumstances.

© 2013 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

13 Inventories |

13.11 Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred include:

(a) abnormal amounts of wasted materials, labour or other production costs;

(b) storage costs, unless those costs are necessary during the production process before a further production stage; (c) administrative overheads that do not contribute to bringing inventories to their present location and condition; (d) selling costs. [FRS102.13.13]

13.12 In some cases, the cost of inventories may be approximated using techniques such as:

(a) standard cost – using normal levels of material, supply, labour, efficiency and capacity. The ‘normal’ base is reviewed regularly to reflect current conditions;

(b) retail method – using percentage gross margin to reduce sales value; and (c) most recent purchase price. [FRS102.13.16]

13.13 The cost of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects is measured by using specific identification of their individual costs. [FRS102.13.17]

13.14 The first-in, first-out (FIFO) or weighted average cost formula is used to measure the cost of inventories, other than those detailed in paragraph 13.13 of this publication. The same cost formula is used for all inventories which are similar in nature or use. For inventories with a different nature or use, different cost formulas may be justified. The last-in, first-out method (LIFO) is not permitted. [FRS102.13.18]

Impairment

13.15 Inventories are assessed for impairment at the end of each reporting date, as described in Section 27 Impairment of assets. An impairment is recognised when the carrying amount is not fully recoverable, for example due to damage, obsolescence or declining selling prices. When an item (or group of items) is impaired, it is measured at its selling price less costs to complete and sell and an impairment loss is recognised. A reversal of a prior impairment is required in some circumstances. [FRS102.13.19]

Recognition as an expense

13.16 The carrying amount of inventory is recognised as an expense in the period in which the related revenue is recognised or when inventory held for distribution is distributed. [FRS102.13.20,20A]

13.17 Inventory allocated to another asset (e.g. used to construct property, plant or equipment) is then accounted for under the appropriate section of FRS 102 (e.g. Section 17 Property, plant and equipment). [FRS102.13.21]

Service providers

13.18 Service providers measure their inventory at cost of production, including costs of labour and attributable overheads. 13.19 Sales and general administrative costs are recognised as expenses in the period incurred.

13.20 Profit margins and non-attributable overheads are not included in the cost of inventories although they are often included in the price to customers. [FRS102.13.14]

Agricultural produce

13.21 See Section 34 for guidance on agricultural produce harvested from biological assets. These are measured initially, at the point of harvest, either at fair value less costs to sell or the lower of cost and estimated selling price less costs to sell. This becomes the cost of the inventories at that date for the application of this section. [FRS102.13.15]

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