INVENTORIES

Inventories

Scope of this section

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13. 1 This section sets out the principles for recognising and measuring inventories. Inventories are assets:
    1. held for sale in the ordinary course of business;
    2. in the process of production for such sale; or
    3. in the form of materials or supplies to be consumed in the production process or in the rendering of services.

12. 2 This section applies to all inventories, except:
    1. work in progress arising under construction contracts, including directly related service contracts (see Section 23 Revenue);
    2. financialinstruments(see Section 11 BasicFinancialInstruments and Section 12 Other Financial Instrument Issues); and
    3. biological assets related to agricultural activity and agricultural produce at the point of harvest (see Section 34 Specialised Activities).

12. 3 This section does not apply to the measurementof inventories held by:
    1. producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at fair value less costs to sell through profit or loss; or
    2. commodity brokers and dealers that measure their inventories at fair value less costs to sell through profit or loss.

Measurement of inventories

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13. 4 An entity shall measure inventories at the lower of cost and estimated selling price less costs to complete and sell.

Cost of inventories

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12. 5 An entity shall include in the cost of inventories all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Costs of purchase

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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.

13. 7 An entity may purchase inventories on deferred settlement terms. In some cases, the arrangement effectively contains an unstated financing element, for example, a difference between the purchase price for normal credit terms and the deferred settlement amount. In these cases, the difference is recognised as interest expense over the period of the financing and is not added to the cost of the inventories

Costs of conversion

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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.

Allocation of production overheads

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13. 9 An entity shall allocate fixed production overheads to the costs of conversion on the basis of the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities.

Joint products and by-products

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13. 10 A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or when there is a main product and a by-product. When the costs of raw materials or conversion of each product are not separately identifiable, an entity shall allocate them between the products on a rational and consistent basis. The allocation may be based, for example, on the relative sales value of each product either at the stage in the production process when the products become separately identifiable or at the completion of production. Most by-products, by their nature, are immaterial. When this is the case, the entity shall measure them at selling price less costs to complete and sell and deduct this amount from the cost of the main product. As a result, the carrying amount of the main product is not materially different from its cost.

Other costs included in inventories

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13. 11 An entity shall include other costs in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition.

13. 12 Paragraph 12.19(b) provides that, in some circumstances, the change in the fairvalue of the hedging instrument in a hedge of fixed interest rate risk or commodity price risk of a commodity held adjusts the carrying amount of the commodity.

Costs excluded from inventories

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13. 13 Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred are:
    1. abnormal amounts of wasted materials, labour or other production costs;
    2. storage costs, unless those costs are necessary during the production process before a further production stage;
    3. administrative overheads that do not contribute to bringing inventories to their present location and condition; and
    4. selling costs.

Cost of inventories of a service provider

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13. 14 To the extent that service providers have inventories, they measure them at the costs of their production. These costs consist primarily of the labour and other costs of personnel directly engaged in providing the service, including supervisory personnel and attributable overheads. Labour and other costs relating to sales and general administrative personnel are not included but are recognised as expenses in the period in which they are incurred. The cost of inventories of a service provider does not include profit margins or non-attributable overheads that are often factored into prices charged by service providers.

Cost of agricultural produce harvested from biological assets

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13. 15 Section 34 requires that inventories comprising agricultural produce that an entity has harvested from its biological assets shall be measured on initial recognition at their fair value less estimated costs to sell at the point of harvest. This becomes the cost of the inventories at that date for application of this section.

Techniques for measuring cost, such as standard costing, retail method and most recent purchase price

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13. 16 An entity may use techniques such as the standard cost method, the retail method or most recent purchase price for measuring the cost of inventories if the result approximates cost. Standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions. The retail method measures cost by reducing the sales value of the inventory by the appropriate percentage gross margin.

Cost formulas

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13. 17 An entity shall measure the cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects by using specific identification of their individual costs.

13. 18 An entity shall measure the cost of inventories, other than those dealt with in paragraph 13.17, by using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified. The last-in, first-out method (LIFO) is not permitted by this Standard.

Impairment of inventories

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13. 19 Paragraphs 27.2–27.4 require an entity to assess at the end of each reportingperiod whether any inventories are impaired, ie the carrying amount is not fully recoverable (for example, because of damage, obsolescence or declining selling prices). If an item (or group of items) of inventory is impaired, those paragraphs require the entity to measure the inventory at its selling price less costs to complete and sell and to recognise an impairment loss. Those paragraphs also require a reversal of a prior impairment in some circumstances.

Recognition as an expense

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13. 20 When inventories are sold, the entity shall recognise the carrying amount of those inventories as an expense in the period in which the related revenue is recognised.

13. 21 Some inventories may be allocated to other asset accounts, for example, inventory used as a component of self-constructed property, plant or equipment. Inventories allocated to another asset in this way are accounted for subsequently in accordance with the section of this Standard relevant to that type of asset.

Disclosures

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13. 22 An entity shall disclose the following:
    1. the accounting policies adopted in measuring inventories, including the cost formula used;
    2. the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity;
    3. the amount of inventories recognised as an expense during the period;
    4. impairment losses recognised or reversed in profit or loss in accordance with Section 27 Impairment of Assets; and
    5. the total carrying amount of inventories pledged as security for liabilities.