Financial Administration Manual
Part:
Section:
Subsection:
Policy:
Financial Reporting
Public Accounts
Overview of General Revenue Fund Accounting
Inventory Accounting
Number:
2160
Date: 2015-10-26
Page:
1 of 10
Inventory Accounting
Objective
The objective is to outline accounting requirements for inventories.
Authority
The Financial Administration Act, 1993, clause 5(c) provides authority
to Treasury Board to prescribe the form and manner of financial
records of the Government of Saskatchewan.
Background
Inventories are a significant economic resource managed by
governments and a key component in the delivery of many services
and programs. There are two main types of inventory. They are
Inventories Held for Consumption or Use and Inventories Held for
Resale.
Most of the Province’s inventories are held for consumption or use and
include diverse categories such as equipment maintenance and airplane
parts, lab supplies and vaccines, pastures maintenance supplies, firefighting equipment, park maintenance supplies and aggregate supplies.
Accurate accounting and reporting of inventories is essential for
governments. Information about inventories is useful for
understanding and assessing a government's accountability for and
management of its asset base and future requirements for replacement.
Inventories form part of a government’s financial position because
they provide economic resources, normally in the form of unconsumed
service potential, that a government can employ in the future to
accomplish its objectives.
Definitions
Cost is the amount of consideration given up to acquire, construct or
develop inventories, and includes all costs directly attributable to
acquisition, construction or development.
Inventories represent items that are purchased or produced and are not
immediately consumed. They are recorded as an asset until they are
issued for consumption or sale, at which time they are expensed.
There are two main types of inventories: Inventories Held for
Consumption or Use and Inventories Held for Resale.
Inventories Held for Consumption or Use are non-financial assets
that will be used or consumed in the normal course of operations.
Because the primary purpose of a government’s operations is to
provide services, the future economic benefit of inventories held for
consumption or use is embodied in their capacity to render service that
Ministry of Finance, Provincial Comptroller’s Office
Financial Administration Manual
Part:
Section:
Subsection:
Policy:
Financial Reporting
Public Accounts
Overview of General Revenue Fund Accounting
Inventory Accounting
Number:
2160
Date: 2015-10-26
Page:
2 of 10
furthers the government’s objectives. They are not intended for sale in
the ordinary course of operations.
Inventories Held for Resale are financial assets that will be sold or
used to produce a product that will be sold in the ordinary course of
operations.
Threshold is the minimum cost an individual category of inventory
must have before it is recorded as an asset in the financial records.
Thresholds are applied on a category-by-category basis individually by
ministry.
Treasury Board Policy
Provincial Comptroller
Directives
Ministry
Responsibilities
.01
Treasury Board requires ministries to follow the accounting
policy of recording inventory as an asset and expensing its use
or consumption as recommended by the Public Sector
Accounting Board (PSAB) of the Chartered Professional
Accountants of Canada (CPA).
.02
Each ministry is responsible to maintain accounting records
and prepare reports for inventories as prescribed by the
Provincial Comptroller.
.03
This policy is effective April 1, 2004.
.04
These requirements apply to the General Revenue Fund (GRF)
and revolving funds.
.05
Accounting policies may change from time to time. These
changes are communicated through notifications from the
Provincial Comptroller and the Province of Saskatchewan –
General Revenue Fund – Year End Reporting Requirements
and Procedures. Ministries should monitor these changes and
apply them to ministry transactions.
.06
Ministries are required to:
•
•
•
acquire and manage inventories to provide effective,
efficient and economical program delivery;
establish and maintain accounting systems to collect,
record and report information on their inventories; and
establish and maintain adequate internal control systems
to ensure the accuracy and reliability of inventory
information and reports.
Ministry of Finance, Provincial Comptroller’s Office
Financial Administration Manual
Part:
Section:
Subsection:
Policy:
Inventory Categories
Held for Consumption
or Use
Financial Reporting
Public Accounts
Overview of General Revenue Fund Accounting
Inventory Accounting
.07
Inventories should be assigned to the appropriate categories
based on their nature and characteristics.
.08
Where ministries are uncertain as to which category an
inventory belongs or where no appropriate category exists, they
should contact the ministry Executive Director/ Director of
Administration who may consult with the Executive Director,
Financial Management Branch (FMB), Provincial
Comptroller’s Office, Ministry of Finance.
.09
The following describes the types of items to include in each
category of inventory held for consumption or use:
•
•
•
•
•
•
•
Held for Resale
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Date: 2015-10-26
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.10
Equipment Maintenance, Airplane Parts and Other
Supplies - includes the entire inventory required to
maintain equipment, airplanes and other capital assets
included in heavy equipment, operating equipment,
vehicles, aircraft, bridges, ferries – vessels and towers and
buildings and related equipment. This category includes
items such as replacement parts, fuel, grease, oil, bridge
timbers, signs, building material, and parts for security
systems, heating, ventilation and air conditioning systems
and building operations.
Lab Supplies and Vaccines - includes water bottles,
gases, chemicals, reagents, general lab supplies and
vaccines.
Pastures Maintenance Supplies - includes fence posts,
wire, feed, lubricants and other items used to maintain the
pastures.
Fire-fighting Equipment - includes all of the general
equipment used to fight forest fires, including such items
as stoves, tents, hoses, shovels, water bladders and fuel.
Park Maintenance Supplies - includes firewood and
park equipment maintenance supplies held in the
government-managed parks.
Aggregate - includes gravel, seal and base aggregate and
asphalt mix used for highway maintenance.
Inventory for Distribution - includes office, janitorial
and other supplies purchased by the Ministry of Central
Services for distribution primarily to other ministries.
Inventories for resale include items that will be sold or used to
produce a product that will be sold in the ordinary course of
operations. They are recorded as financial assets. Ministries
Ministry of Finance, Provincial Comptroller’s Office
Financial Administration Manual
Part:
Section:
Subsection:
Policy:
Financial Reporting
Public Accounts
Overview of General Revenue Fund Accounting
Inventory Accounting
Number:
2160
Date: 2015-10-26
Page:
4 of 10
should advise the Provincial Comptroller of categories of
inventory held for resale.
Excluded Inventories
.11
The following inventory categories are excluded from this
policy. All items in these categories should be expensed when
purchased:
•
•
•
•
Cost
.12
Inventories should be recorded at cost.
.13
The cost of inventory includes the purchase price of the
inventory items and other acquisition costs such as shipping
and handling charges, insurance costs and duties.
.14
The method selected for determining cost should be one that
results in the fairest matching of costs with program delivery
activity.
.15
Several common methodologies used to determine cost are:
•
•
•
Thresholds
office supplies (pens, paper, pencils, post-its);
institutional supplies (food, medicine, linens and health
clinic supplies);
election readiness (forms, maps, booklets, pens, paper,
clipboards, buttons, ballot paper); and
other highway maintenance (salt and calcium, culverts,
paint, and asphalt).
Specific identification – the cost of each item in the
inventory is identified on an item-by-item basis;
Average cost – the cost of an item is determined from the
weighted average of the cost of similar items purchased
during the year; and
First in first out – the cost of the first items purchased is
the cost assigned to the first goods sold or consumed.
.16
A threshold represents the minimum cost an individual
category of inventory must have before it is to be recorded on
the statement of financial position.
.17
A threshold of $100,000 per category should be applied on a
ministry-by-ministry basis.
.18
Inventories that meet the definition of inventory but are under
the threshold should be expensed in the year in which they are
Ministry of Finance, Provincial Comptroller’s Office
Financial Administration Manual
Part:
Section:
Subsection:
Policy:
Financial Reporting
Public Accounts
Overview of General Revenue Fund Accounting
Inventory Accounting
Number:
2160
Date: 2015-10-26
Page:
5 of 10
purchased.
.19
Ministries or revolving funds may choose a lower threshold for
recording inventories held for resale.
Capitalized Inventories
.20
Inventories should be capitalized when they are a direct cost of
a constructed or developed asset.
Write-downs
.21
Inventories held for consumption or use should be written
down when a reduction in the value of their service potential
can be measured and the reduction is expected to be
permanent.
.22
Inventories held for resale should be written down when their
net realizable value is less than their cost and the reduction is
expected to be permanent.
.23
Ministries may need to consider a write-down where they hold
obsolete inventory, slow moving inventory or damaged items,
or when inventory levels are expected to be surplus to needs.
.24
All write-downs should be approved by the permanent head or
delegate. Documentation for write-downs should be submitted
to the Provincial Comptroller for review.
.25
Write-downs of inventory should be accounted for as an
expense of the current period.
.26
Generally, a write-down should not be reversed.
.27
If inventory is donated to the Government, the cost is its fair
value at the date of contribution. Fair value of donated inventory
may be estimated using market or appraised value. Refer to
Section 3525 Receipt of Donations.
Donated Inventories
HU
Budgeting
.28
Accounting Requirements .29
Ministries are required to appropriate funds for inventory
purchases. Any significant changes in the value of inventories
and write-downs should be budgeted for and displayed in the
Estimates.
Each ministry is responsible for recording transactions for its
own inventories in the Government’s central financial system
and maintaining a supporting detailed subsidiary ledger.
Ministry of Finance, Provincial Comptroller’s Office
Financial Administration Manual
Part:
Section:
Subsection:
Policy:
Financial Reporting
Public Accounts
Overview of General Revenue Fund Accounting
Inventory Accounting
.30
Inventory purchases are charged to an appropriation and are
initially expensed. Inventory items returned in the same year
they are purchased should be recorded as refunds to vote in
accordance with Section 3005 Refunds to Vote. Inventory
items returned in subsequent years should be recorded as
refunds - previous years’ expenses.
HU
.31
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Date: 2015-10-26
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UH
The change in inventory account is used to adjust the inventory
balance without affecting spending control. Balances in this
account are included in the statement of operations. All
adjustments to inventory are recorded through the change in
inventory account including the following:
•
Increases in inventory:
• the initial recording of new inventory; and
• purchases.
•
Decreases in inventory:
• inventory usage;
• inventory returns; and
• write-downs.
Refer to Schedule A for examples of transactions and the
appropriate accounting for them.
.32
Ministries are responsible for maintaining source documents,
working papers and files supporting inventory transactions for
internal and external audit and review.
.33
Each ministry should maintain an inventory subsidiary ledger
which substantiates and is in agreement with the ministry’s
inventory information recorded in the Government’s central
financial system.
.34
Ministries should at least annually agree the cost information in
the subsidiary ledger to the inventory balance recorded in the
central financial system. Any differences should be followed
up and any required accounting entries made.
.35
Ministries should maintain sufficient information in their
subsidiary ledgers to meet reporting and internal control
requirements.
Ministry of Finance, Provincial Comptroller’s Office
Financial Administration Manual
Financial Reporting
Public Accounts
Overview of General Revenue Fund Accounting
Inventory Accounting
Part:
Section:
Subsection:
Policy:
Number:
2160
Date: 2015-10-26
Page:
7 of 10
.36
Where a ministry believes that any of the requirements set
out in this directive are inappropriate for the ministry or a
revolving fund under its administration, the ministry may
submit a written request to the Provincial Comptroller for an
exemption. The request should outline the reasons why the
requirements are not suitable and include a plan that would be
more appropriate.
.37
The Provincial Comptroller will advise the ministry of the
decision in writing.
Further Information
.38
Questions regarding inventory accounting may be directed to
the ministry Executive Director/Director of Administration
who may consult with the Executive Director, FMB.
References
3525
3800
3805
Receipt of Donations
Control of Property
Management of Inventories
Exemption from
Requirements
Province of Saskatchewan – General Revenue Fund – Year End
Reporting Requirements and Procedures
H
CPA Public Sector Accounting Handbook, PS 1200 – Financial
Statement Presentation
CPA Handbook, 3031 – Inventories
Ministry of Finance, Provincial Comptroller’s Office
Financial Administration Manual
Part:
Section:
Subsection:
Policy:
Financial Reporting
Public Accounts
Overview of General Revenue Fund Accounting
Inventory Accounting
Number:
2160
Date: 2015-10-26
Page:
8 of 10
Schedule A
Illustrative Entries
Thresholds (paragraphs 2160.16 to 2160.19)
1. Ministry X reviews its records of lab supplies and vaccines at year-end and determines the
cost is $1.3 million. This is a new category of inventory for the Ministry and has never been
recorded before.
Lab Supplies and Vaccines Inventory
Change in Inventory Held for Consumption or Use
- initial recording of inventory
Debit
$1,300,000
Credit
$1,300,000
2. Ministry X reviews its records of equipment maintenance at year-end and determines the cost
is $90,000. This category of inventory had previously been recorded at $110,000.
Debit
$110,000
Credit
Change in Inventory Held for Consumption or Use
Equipment Maintenance, Airplane Parts and Other
Supplies Inventory
$110,000
- record change in inventory (remove the inventory as it is now under the threshold)
3. Ministry X reviews its records of equipment maintenance at year-end and determines the cost
is $4 million. This category of inventory had previously been recorded at $3.5 million.
Debit
Equipment Maintenance, Airplane Parts and Other
Supplies Inventory
Change in Inventory Held for Consumption or Use
- record change in inventory
Credit
$500,000
$500,000
Write-down (paragraphs 2160.21 to 2160.26)
4. In July, Ministry X reviewed its inventory of Lab Supplies and Vaccines. Staff determined
that a shipment of glass beakers purchased last year worth $24,000 is missing. This
inventory category is currently recorded by the Ministry at $2.8 million.
Debit
Credit
Change in Inventory Held for Consumption or Use
$24,000
Lab Supplies and Vaccines Inventory
$24,000
- record write-down of inventory and report to the Provincial Comptroller
Ministry of Finance, Provincial Comptroller’s Office
Financial Administration Manual
Part:
Section:
Subsection:
Policy:
Financial Reporting
Public Accounts
Overview of General Revenue Fund Accounting
Inventory Accounting
Number:
2160
Date: 2015-10-26
Page:
9 of 10
5. Ministry X purchases new pumps for forest fire fighting. As a result, none of the hoses
currently recorded in inventory fit and they have no other use to the Ministry. The old hoses
have a cost of $78,000.
Change in Inventory Held for Consumption or Use
Fire-fighting Equipment Inventory
- record write-down of inventory
Debit
$78,000
Credit
$78,000
Acquiring Inventory (paragraph 2160.30)
6. Ministry X purchases replacement parts and oil for the maintenance of its vehicle fleet for
$27,000. Their inventory of equipment maintenance items is currently recorded at $2.2
million.
Repairs and Maintenance Expense
Accounts Payable
- record purchase
Debit
$27,000
Credit
$27,000
Excluded Inventory (paragraph 2160.11)
7. Ministry X reviews its records of stationery at year-end and determines the cost is $121,000.
No entry required.
inventory.
Office supplies are expensed when purchased and not recorded as
Inventory Returns (paragraphs 2160.30)
8. In November, Ministry X determines that equipment with a cost of $100,000, that was
purchased and set up as inventory in October, is defective and returns the equipment for a
refund.
Debit
Credit
Accounts Receivable
$100,000
Repairs and Maintenance Expense
$100,000
- a debit memo records the refund to vote (to the same account used to record the
original expense)
Ministry of Finance, Provincial Comptroller’s Office
Financial Administration Manual
Part:
Section:
Subsection:
Policy:
Financial Reporting
Public Accounts
Overview of General Revenue Fund Accounting
Inventory Accounting
Number:
2160
Date: 2015-10-26
Page:
10 of 10
At the same time, or as part of a journal entry to record other changes to inventory, the
inventory balance is updated for the return:
Change in Inventory Held for Consumption or Use
Equipment Maintenance, Airplane Parts and Other
Supplies Inventory
- record change in inventory
$100,000
$100,000
9. In May, Ministry X determines that an airplane part with a cost of $45,000, that was
purchased and set up as inventory in the previous fiscal year, is defective and returns the
airplane part for a refund.
The accounts receivable, refund and change in inventory can be recorded as one journal
entry, or the change in inventory can be recorded separately as part of the normal process to
adjust inventory:
Debit
Accounts Receivable
$45,000
Refunds – Previous Years’ Expenses
- record the refund without affecting the current year appropriation
Change in Inventory Held for Consumption or Use
Equipment Maintenance, Airplane Parts and Other
Supplies Inventory
- record change in inventory
Ministry of Finance, Provincial Comptroller’s Office
Credit
$45,000
$45,000
$45,000