ASPE Section 3031 – Inventories

Inventory (ASPE)
Last Updated: October 10, 2012

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Inventory is covered under

  • IFRS – IAS 2 (Inventories); and
  • ASPE – Section 3031 (Inventories)

This section applies to all inventories (for ASPE), except:

  • Contracts accounting for using the Percentage of Completion method
  • Financial instruments
  • Spare parts usually treated as inventory, but if major enough, can be classified as Property, Plant and Equipment.

See also notes on specific exclusions from measurement under Measurement of Inventories.

 

Definition

Inventories are assets:

  • Held for sale as part of the normal course of business (finished goods);
  • In the production process (unfinished goods)
  • Materials or supplies to be consumed in the production process/rendering services

Net realizable value = Selling price – Estimated cost of completion – Costs to make the sale

Fair Value = Selling price at an arms-length transaction on market

FV is the total revenue that the transaction will generate while NRV is the amount the entity expects to realize.

Measurement of Inventories

Inventory is measured at the lower of cost and net realizable value.

Cost = All costs to:

  • purchase,
  • convert
    • direct labour
    • systemic allocation of fixed/variable production overhead
  • bring the inventory to its present location and condition
    • import duties/taxes,
    • transport,
    • handling and other direct costs less any costs that are recoverable

Items that are excluded from inventory:

  • Abnormal wasted materials or labour
  • Storage costs unless these costs are necessary before a further production stage
  • Administrative overhead (not specific to inventory)
  • Selling costs

Interest costs are included when the inventory takes a substantial time to become finished and the entities policy is to capitalize interest costs.

Techniques for measuring costs

  • Standard Cost Method: Use normal levels of materials, labour, efficiency. Should be regularly reviewed for change in conditions.
  • Retail Method: Often used in retail industry. Reduce the sale value of the inventory by the appropriate percentage of gross margin.

Measurement Exclusions (This section does not apply)

  • For agricultural, forest and mineral products held by producers which are measured at net realizable value based on well-established practices in these industries.
  • Inventories held by commodity broker-traders who measure inventories at fair value less cost to sell. Changes in FV are recognized in net income in period of change.
  • Inventories of living animals and plants (biological assets) and the harvested product of the biological asset. However it does apply to assets processed after harvesting.

Cost Formulas

Must choose a specific method for inventories that have a similar nature.

  • Specified Identification: This method may be used when inventory is not interchangeable and can be specifically identified.
  • First-in, First-out: Inventory purchased first is considered sold first. Items remaining in inventory at period end were those purchased most recently.
  • Weighted Average: Each new item is assigned a weighted average cost based on the previous similar items at the beginning of the period and purchased during the period. Can be calculated on a periodic basis or as each shipment is received.

Net Realizable Value

Inventories may at times become obsolete or diminish in value and must be written down to net realizable value.

Evidence that a write down is necessary:

  • Damage to inventory
  • Obsolescence
  • Decline in selling prices

Inventories should be written down item by item but grouping is permitted for similar products with similar end purposes. It’s not permitted to write down inventories based on classification (finished goods, by geographic segment, etc.)

When the circumstances that existed which required the write down no longer exist, the write-down may be reversed back up to cost. The item is then valued at the lower of cost or revised net realizable value.

Recognition

When inventories are sold, the carrying value of the inventory is recognized as an expense at the same time as the revenue is recognized.

When a write down is required, the write down is expensed in the period when the write down occurs. Reversals of write downs are also recorded in the period which they occur.

Disclosure

  • Accounting policies adopted to measure inventories including costing method.
  • Total carrying amount classified appropriately for the entity (i.e. merchandise, production supplies, materials, work in progress, finished goods, etc.)
  • The amount of inventory recognized as an expense during the period (cost of sales)

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