IPSAS 12—INVENTORIES Acknowledgment This International Public Sector Accounting Standard (IPSAS) is drawn primarily from International Accounting Standard (IAS) 2 (Revised 2003), “Inventories,” published by the International Accounting Standards Board (IASB). Extracts from IAS 2 are reproduced in this publication of the International Public Sector Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC) with the permission of the International Accounting Standards Committee Foundation (IASCF). The approved text of the International Financial Reporting Standards (IFRSs) is that published by IASB in the English language, and copies may be obtained directly from IASB Publications Department, 30 Cannon Street, London EC4M 6XH, United Kingdom. E-mail: [email protected] Internet: http://www.iasb.org IFRSs, IASs, Exposure Drafts, and other publications of the IASB are copyright of the IASCF. “IFRS,” “IAS,” “IASB,” “IASCF,” “International Accounting Standards,” and “International Financial Reporting Standards” are trademarks of the IASCF and should not be used without the approval of the IASCF. IPSAS 12 314 December 2006 IPSAS 12—INVENTORIES CONTENTS Paragraph SECTOR PUBLIC Introduction ............................................................................................. IN1–IN14 Objective .................................................................................................. 1 Scope ....................................................................................................... 2–8 Definitions ............................................................................................... 9–14 Net Realizable Value ........................................................................ 10 Inventories ........................................................................................ 11–14 Measurement of Inventories .................................................................... 15–43 Cost of Inventories ........................................................................... 18–31 Costs of Purchase ...................................................................... 19 Costs of Conversion .................................................................. 20–23 Other Costs ................................................................................ 24–27 Cost of Inventories of a Service Provider .................................. 28 Cost of Agricultural Produce Harvested from Biological Assets 29 Techniques for the Measurement of Cost .................................. 30–31 Cost Formulas .................................................................................. 32–37 Net Realizable Value ........................................................................ 38–42 Distributing Goods at No Charge or for a Nominal Charge ............. 43 Recognition as an Expense ...................................................................... 44–46 Disclosure ................................................................................................ 47–50 Effective Date .......................................................................................... 51–52 Withdrawal of IPSAS 12 (2001) .............................................................. 53 Basis for Conclusions Comparison with IAS 2 315 IPSAS 12 INVENTORIES International Public Sector Accounting Standard 12, “Inventories,” is set out in paragraphs 1–53. All the paragraphs have equal authority. IPSAS 12 should be read in the context of its objective, the Basis for Conclusions, and the “Preface to International Public Sector Accounting Standards.” IPSAS 3, “Accounting Policies, Changes in Accounting Estimates and Errors,” provides a basis for selecting and applying accounting policies in the absence of explicit guidance. IPSAS 12 316 INVENTORIES Introduction IN1. IPSAS 12, “Inventories,” replaces IPSAS 12, “Inventories” (issued July 2001), and should be applied for annual reporting periods beginning on or after January 1, 2008. Earlier application is encouraged. PUBLIC SECTOR SECTOR PUBLIC Reasons for Revising IPSAS 12 IN2. The IPSASB developed this revised IPSAS 12 as a response to the IASB’s project on Improvements to IASs and its own policy to converge public sector accounting standards with private sector standards to the extent appropriate. IN3. In developing this revised IPSAS 12, the IPSASB adopted the policy of amending the IPSAS for those changes made to the former IAS 2, “Inventories” made as a consequence of the IASB’s improvements project, except where the original IPSAS had varied from the provisions of IAS 2 for a public sector specific reason; such variances are retained in this IPSAS 12 and are noted in the Comparison with IAS 2. Any changes to IAS 2 made subsequent to the IASB’s improvements project have not been incorporated into IPSAS 12. Changes from Previous Requirements IN4. The main changes from the previous version of IPSAS 12 are described below. Objective and Scope IN5. The Standard clarifies in paragraphs 1 and 2 that the Standard applies to all inventories that are not specifically excluded from its scope. Previously, IPSAS 12 applied to “accounting for inventories under the historical cost system.” IN6. The Standard establishes a clear distinction between those inventories (a) that are entirely outside the scope of the Standard; and (b) that are outside the scope of measurement requirements but within the scope of the other requirements in the Standard (see paragraphs 2 and 3). IN7. Inventories that are outside the measurement requirements of the Standard are those held by: (a) producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value in accordance with well-established practices in those industries, and (b) commodity broker-traders measured at fair value less costs to sell. IN8. To qualify for this exemption, changes in recognized amounts of these inventories are to be included in surplus or deficit in the period of the changes. IN9. Previously, IPSAS 12 did not make this distinction with respect to scope exemptions. 317 IPSAS 12 INVENTORIES Cost of Inventories IN10. The Standard prohibits exchange differences arising directly on the recent acquisitions of inventories invoiced in a foreign currency from being included in the cost of purchase of inventories (see previous paragraph 15). IN11. Previously, this was allowed under the allowed alternative treatment contained in the superseded version of IPSAS 4, “The Effects of Changes in Foreign Exchanges Rates.” This alternative treatment has also been eliminated in IPSAS 4. IN12. The Standard requires in paragraph 26 that when inventories are purchased with deferred settlement terms, the difference between the purchase price for normal credit terms and the amount paid is recognized as interest expense over the period of financing. Previously, IPSAS 12 did not contain this requirement. Disclosures IN13. The Standard requires the following additional disclosure items (see paragraph 45): • The carrying amount of inventories carried at fair value less costs to sell. • The amount of any write-down of inventories recognized as an expense in the period. IN14. Previously, IPSAS 12 did not contain these disclosure requirements IPSAS 12 318 INVENTORIES Objective 1. The objective of this Standard is to prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognized as an asset and carried forward until the related revenues are recognized. This Standard provides guidance on the SECTOR PUBLIC determination of cost and its subsequent recognition as an expense, including any writedown to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Scope 2. An entity that prepares and presents financial statements under the accrual basis of accounting shall apply this Standard in accounting for all inventories except: (a) Work-in-progress arising under construction contracts, including directly related service contracts (see IPSAS 11, “Construction Contracts”); (b) Financial instruments (see IPSAS 28, “Financial Instruments: Presentation” and IPSAS 29, “Financial Instruments: Recognition and Measurement); (c) Biological assets related to agricultural activity and agricultural produce at the point of harvest (see IPSAS 27, “Agriculture”); and (d) Work-in-progress of services to be provided for no or nominal consideration directly in return from the recipients. 3. This Standard does not apply to the measurement of inventories held by: (a) Producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value in accordance with well-established practices in those industries. When such inventories are measured at net realizable value, changes in that value are recognized in surplus or deficit in the period of the change; and (b) Commodity broker-traders who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognized in surplus or deficit in the period of the change. 4. This Standard applies to all public sector entities other than Government Business Enterprises. 319 IPSAS 12 INVENTORIES 5. The “Preface to International Public Sector Accounting Standards”