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ASPE Section 3031 – Inventories

Inventory (ASPE)
Last Updated: October 10, 2012

You can find a printer-friendly study sheet in PDF format by clicking here!


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)

Section 3400 – Revenue (ASPE) UFE Study Guide

Revenue (IFRS)
Last Updated: October 3, 2012

You can find a printer-friendly study sheet in PDF format by clicking here!


Revenue is covered under

  • IFRS – IAS 18 (Revenue); and
  • ASPE – Section 3400 (Revenue)

Determine first whether the entity is a public entity required to use IFRS or private entity opting to use IFRS. Private entities opting to use ASPE should use the ASPE guidance. This standard covers the sale of goods and the rendering of services by an entity in the ordinary course of business.

This section excludes the following types of transactions:

  • Revenues from investments accounted under the equity method (Section 3051)
  • Revenues from lease agreements (Section 3065)
  • Revenues from Government grants (Section 3800)

 

Under ASPE (Section 3400)

Definitions

  • Revenue is the cash, receivables and other consideration coming into the business from its ordinary business activity such as sale of goods or provision of services.
  • Revenue collected on behalf of another party (sales tax for example) is not an economic benefit for the entity and is excluded from Revenue.
  • The Completed Contract Method recognizes revenue when the good or service has been sold/rendered and the contract is substantially complete.
  • The Percentage of Completion Method recognizes revenue proportionately with the degree of completion of the service/product.

 Recognition

 Sales of Goods

Performance is considered complete when:

  • Significant risks and rewards of ownership are transferred.
    • No liability for unsatisfactory performance remains to seller
    • Purchaser cannot rescind the transaction
    • Goods are not sold under consignment
  • All significant acts for the transaction are complete
  • Seller retains no continuing managerial involvement or control of the goods
  • The amount of consideration for the transaction is measurable considering possible returns

Service Contracts

Performance is determined using whichever method relates the revenue to work completed best and once measurement of the consideration is known:

  • Percentage of Completion Method –
    • When there is more than one act, must use rational and consistent basis such as sales value, associated costs, progress, number of acts, etc.
    • When unknown number of acts over a known period of time you could use straight-line basis unless evidence of a better method exists.
    • Amounts billed are not an appropriate basis for measurement.
  • Completed Contract Method –
    • Only appropriate when performance is a single act or when there is no reasonable way to estimate the extent of progress towards completion.

Additional Performance Criteria (Applies to Goods and Services)

Performance is considered complete when:

  • Persuasive evidence of an arrangement exists, consider:
    • Customary business practices
    • Side arrangements
    • Consignment arrangements
    • Rights of return
    • Requirements to repurchase the product
  • Delivery has occurred or services rendered, consider:
    • Bill and hold arrangements
    • Customer acceptance of the product
    • Layaway sales arrangements
    • Non-refundable fee arrangements
    • Licensing and similar fee arrangements
  • Sellers’ price to the buyer is fixed and determinable, consider:
    • Cancellable sales arrangements
    • Right of return arrangements
    • Price protection and/or inventory credit arrangements
    • Refundable fee for service arrangements

Multiple-Deliverable Transactions

Recognition criteria are usually applied to individual transactions but there are many cases when there are separately identifiable components of a single transaction. This is sometimes referred to as multiple-deliverable transactions. When this occurs (use judgment) then the recognition criteria should be applied to each individual component. An example of this is the sale of software where there is also an identifiable amount of separate servicing for a given amount of time.

Interest, Royalties and Dividends

Interest, Royalties and Dividends shall be recognized when it’s probable that the economic benefits will flow to the entity and the amount of revenue is measurable.

Revenue is recognized for each as follows:

  •  Interest: On a time-proportion basis
  • Royalties: Accrual basis based on the substance of the agreement
  • Dividends: When the right to receive the payment is established

 

 Effect of Uncertainties

 In order to recognize revenue, collection must ultimately be assured. When there is uncertainty regarding ultimate collection then revenue should be recorded only when case is received.

When it’s uncertain that you will collect from an entity after revenue is recognized this is treated as a bad debt expense not a reduction in revenue.

Revenue would not be recognized in cases when the amount of consideration is not clearly known (depends on resale) or when returns are not predictable.

Reporting Revenue Gross vs. Net

In more complex situations you would have to determine whether the entity is acting as a principal or an agent in an agency relationship.

An entity is acting as a principal when it has exposure to the significant risks and rewards. Consider:

  • The entity has the primary responsibility for providing the goods or service to the customer.
  • Entity has inventory risk in the process.
  • Entity has flexibility in establishing the price.
  • Entity bears credit/collection risk.

Principal = Use Gross Revenue, Agent = Use Net Revenue


Please report errors, omissions or suggestions to technical@ufeblog.com

IAS 18 – Revenue UFE Study Guide

Revenue (IFRS)
Last Updated: October 1, 2012

You can find a printer-friendly study sheet in PDF format by clicking here!


Revenue is covered under

  • IFRS – IAS 18 (Revenue); and
  • ASPE – Section 3400 (Revenue)

Determine first whether the entity is a public entity required to use IFRS or private entity opting to use IFRS. Private entities opting to use ASPE should use the ASPE guidance. This standard covers the sale of goods and the rendering of services by an entity but does not apply to construction contracts nor extraction of mineral ores.


Under IFRS (IAS 18)

Definition

  • Revenue is the cash coming into the business from its ordinary business activity such as sale of goods or provision of services.
  • Revenue collected on behalf of another party (sales tax for example) is not an economic benefit for the entity and is excluded from Revenue.

 Measurement

  • Revenue is measured at fair value of consideration received or receivable on the date of the transaction. (IFRS 13 covers Fair Value)
  • When similar goods or services are swapped, this is not considered a transaction which generates revenue.
  • In transactions that have deferred receivable amounts and constitute a financing transaction, the time value of money should be considered and all future receipts are discounted using an imputed interest rate.
    • The imputed rate is the more determinable of the prevailing rate of a similar instrument; or
    • an interest rate that discounts the instrument to the current cash price of the good or service.

Identification of the Transaction

Recognition criteria are usually applied to individual transactions but there are many cases when there are separately identifiable components of a single transaction. This is sometimes referred to as multiple-deliverable transactions. When this occurs (use judgment) then the recognition criteria should be applied to each individual component. An example of this is the sale of software where there is also an identifiable amount of separate servicing for a given amount of time.

Sale of Goods

Revenue Recognition Criteria (All must be met):

  • significant risks and rewards have been transferred
    • Consider: performance warranties, consignment sales, installation still required, buyer can rescind the contract and seller is unsure about probability of return. All these might indicate risks remain.
    • Insignificant risks such as return options for unsatisfied customers should still be recognized if an estimate of returns can be made.
  • managerial involvement and control over the good sold has ceased
  • the amount of revenue is measurable
  • it is probably that the economic benefits will flow to the entity
    • When it’s uncertain that you will collect from an entity after revenue is recognized this is treated as a bad debt expense not a reduction in revenue.
  • the entity’s costs relevant to the transaction can be measured reliably, this is the matching principle and may result in deferred revenue liability.

Rendering of Services

Revenue for services is recognized by reference to the stage of completion (percentage of completion method). The following conditions must all be met:

  • the amount of revenue is reliably measurable
  • it is probable that the economic benefits will flow to the entity
    • When it’s uncertain that you will collect from an entity after revenue is recognized this is treated as a bad debt expense not a reduction in revenue.
  • the stage of completion on the reporting period can be measured reliably
    • A variety of ways can be used to measure the stage of completion including surveys of work performed, services performed / total services, or the proportion of costs to-date / total expected costs. Ignore progress payments.
    • When services are performed in an indeterminate amount of acts then usually it’s recognized straight-line over the specified period unless one act is more significant than any other act in which case recognition is postponed until that act is complete.
    • When the outcome of rendering services cannot be reliably measured then revenue shall be recognized only to the extent of the expenses recognized are recoverable. If recoverability of these expenses is not likely than no revenue should be recognized.
  • the entity’s costs relevant to the transaction can be measured reliably

Interest, Royalties and Dividends

Interest, Royalties and Dividends shall be recognized when it’s probable that the economic benefits will flow to the entity and the amount of revenue is measurable.

Revenue is recognized for each as follows:

  • Interest: Effective interest method (IAS 39 and AG5-AG8)
  • Royalties: Accrual basis based on the substance of the agreement
  • Dividends: When the right to receive the payment is established

Please report errors, omissions or suggestions to technical@ufeblog.com

Non-Monetary Transaction [IAS 16, IAS 38, IAS 40, SIC-31 and Section 3831]

Non-Monetary Transactions
Last Update: November 16, 2013

You can find a printer-friendly study sheet in PDF format by clicking here!


Non monetary transactions are covered under

  • IFRS – IAS 16 (Property, plant and equipment), IAS 38 (Intangible Assets), IAS 40 (Investment Property) and SIC-31(Revenue – Barter transactions involving advertising services); and
  • ASPE – Section 3831 – non-monetary transactions

Determine first whether the entity is a public entity required to use IFRS or private entity opting to use IFRS. Private entities opting to use ASPE should use the ASPE guidance.


Under IFRS (IAS 16)

Measurement

Non-Monetary Exchanges of Advertising (SIC-31 Interpretation)

Revenue from a non-monetary barter transaction involving advertising cannot be measured at the fair value of advertising services received. A seller may recognize revenue at the fair value of advertising services provided by reference to a non-barter transaction that is:

a)    similar to the barter transaction;
b)    occurs often;
c)    represents a predominant number of transactions and amount when compared to all transactions to provide advertising that is similar to the advertising of the barter transaction;
d)    involves cash or other such forms of consideration that has a reliable fair value; and
e)    Does not involve the same counterparty as in the barter transaction.

Other Non-Monetary Exchanges

Non-monetary transactions are measured at the fair value of the asset received unless the fair value of the item given up is more clearly measurable. The entity measures the transaction at fair value unless one of the following conditions is met:

a) the transaction lacks commercial substance – in other words, the items exchanged would provide similar risk and cash flows as before if the transaction lacks commercial substance;
b) the fair value of both the asset given up or asset received is not reliably measurable

The acquired item is measured this way even if the item given up cannot be immediately derecognised.

 

Under ASPE (Section 3831)

Under ASPE, the entity must measure an asset exchanged or transferred in a non-monetary transaction at the more reliably measurable of the fair value of the asset given up or received unless one of the following situations exists:

a)    the transaction lacks commercial substance – in other words, the items exchanged would provide similar risk and cash flows as before if the transaction lacks commercial substance;
b)    the transaction is an exchange of a product held for sale in the normal course of business;
c)    neither fair value of the asset received or exchanged is reliably measurable; or
d)    the transaction is a non-monetary non-recipricle transfer to owners – this is a spin-off or other form of restructuring or liquidation

Gains and Losses are recognized in net income for the period.


Please report errors, omissions or suggestions to technical@ufeblog.com

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