Intermediate Accounting II Topic: Accounting for Inventories, Part 1 Provision: IAS 2 Inventories (accounts for the treatment of inventories) - Amount of cost that to be recognized as an asset, meaning, the amount reported as “Inventory” in the Statement of Financial Position - Amount of cost to be carried forward until related revenues are recognized - IAS 2 provides guidance on: 1. the determination of cost and its subsequent recognition as expense right down to its net realizable value 2. the cost formulas that are used to assign cost to inventories - Applies to all inventories except: 1. Financial instruments (which are accounted for through IFRS9) 2. Biological assets related to agricultural activity and agricultural produce up to the point of harvest (for some companies that are into agricultural activities, the agricultural produce from the biological assets will be later classified as inventory but IAS 2 Inventories will only be applied only after the point of harvest; before this it will be accounted for by IAS 41 Agriculture) Definition of Inventories - Inventories are assets: Definition Type of Inventory Held for sale in the ordinary course of business Merchandise Inventory and Finished Goods Inventory In the process of production for such sale Work-in-Process Inventory In the form of materials or supplies to be consumed in the production process or in the rendering of services Raw Materials Inventory and Supplies XQC - By type of business: Type of Business Service Business Merchandising Business Manufacturing Business Type of Inventory Supplies Merchandise Inventory Raw Materials Inventory Work-in-Process Inventory Finished Goods Inventory Initial Measurement of Inventories - Inventories are measured on its initial recognition at COST. - The cost shall comprise of: Composition All Cost of purchase Definition Includes: o Import Duties o Irrecoverable Purchase Taxes (not recoverable from customers and/or other parties) o Transport Costs o Handling Costs o Other Directly Attributable Costs Less: o Trade Discounts o Rebates Cost of conversion o Direct Labor o Systematic Allocation of Fixed Production Overhead (based on normal capacity) *lower production than normal capacity - allocation to each unit of production is not increased as a result of idle plant - even though the number of units produced is lesser than the normal capacity - results into unallocated overhead which is expensed as incurred in the period XQC *higher production than normal capacity (periods of abnormally high production) - allocation to each unit of production is decreased so that inventories are not measured above cost o Variable Production Overhead (based on actual use) Other Costs ⮚ Other costs such as non-production overhead incurred in bringing the inventories to its present location and condition Exclusion from cost of inventories (Non-Inventoriable Costs) - Abnormal amounts of wasted materials, labor, or other production costs - Storage costs, unless those costs are necessary in the production process (if the storage cost is incurred in relation to finished goods, then it is non-inventoriable) - Administrative overheads that do not contribute to bringing inventories to their present location or condition (this is different from administrative factory overhead cost which is inventoriable) - Selling Costs (Marketing cost which is non-inventoriable) - Profit Margins or non-attributable overheads that are often factored into prices charged by service provider (Inventory is measured at cost, not at selling price) - Borrowing costs incurred in connection with the acquisition of inventory unless the inventory is a qualifying asset (in relation to IAS23 Borrowing cost; Cost incurred in relation to borrowings are treated as financing cost even if the proceeds of the borrowed fund is used in the acquisition of inventories as long as it is not a qualifying asset it is noninventoriable Cost of agricultural produce harvested from biological assets - The deemed cost of inventories comprising agricultural produce harvested from biological assets is the fair value less cost to sell at the point of harvest (for example, mangoes harvested in a mango plantation to be held for sale as inventories, according to IAS2 is XQC accounted for based on fair value less cost to sell at the time they were harvested and would be the deemed as the cost of inventory) Goods in Transit – Ownership at Reporting Date - Terms of shipment will determine the ownership of goods in transit at reporting date - Ownership pertains to legal title and economic control Term of Shipment Description Ownership at Reporting Date FOB Shipping Point (FOB Seller) Ownership changes at shipping point as it shifts from the seller to the buyer with the loading of goods at the point of shipment Buyer - Should include goods in inventory and corresponding liability - Should shoulder the freight cost - If freight prepaid; freight cost will be treated as an addition to the receivable of the seller FOB Destination (FOB Buyer) Ownership changes at destination as it is delivered to the buyer through physical receipt Seller - Physical Receipt of goods determines when the goods should be recorded as inventory - Seller shoulder the freight cost - If freight collect, freight cost will be treated as a deduction to the receivable of the seller XQC Goods in Transit - Maritime Shipping Terms - Goods shipped by water/by sea Term of Shipment Free Alongside (FAS) Description - Seller will bear all expenses and the risk involved in bringing the product to the dock next to the vessel from which the goods are to be shipped (sa pantalan) Ownership - - Cost, Insurance, and Freight (CIF) - - Ex-Ship - Buyer agrees to pay in lump sum the cost of the goods, the insurance, and the freight. Until the goods are fully loaded, the seller bears the cost of any loss or damage to the product - The seller bears all expenses and risk of loss until the goods are unloaded at which time, the title and risk of loss pass to the buyer - - Goods are transferred to the ownership of the buyer when carrier takes possession of goods Buyer bears the cost of loading and shipment Goods in transit are owned by buyer Title and risk of loss shall be passed to the buyer upon delivery of the goods to the carrier Goods in transit are owned by buyer Goods in transit are still owned by the seller Goods on Consignment XQC - Goods are included in the inventory of the consignor (company delivering the goods) at cost plus the handling and shipping costs incurred in the delivery of the goods to the consignee (the company receiving and selling the goods) - Goods may be transferred from one party to another by contract of sale without the ownership and economic control changing hands (there is transfer of goods without transfer of ownership) - Example: Goods in the department store are not actually “owned” by the mall, they are simply the consignee (receives and sells the goods). The company that delivers these goods to the mall are the consignor and they have ownership over the said goods - Consignor includes “goods out on consignment” while Consignee excludes “goods held on consignment” Special Order Goods - Goods manufactured according to customer specifications are considered sold when completed and therefore excluded from the seller’s inventory, even if the goods are still in the seller’s possession - However, if goods are customarily manufactured and constituted as stock items of the enterprise, which means that it is normally held by the company, even if it is physically segregated to be sold to a specific customer. (this is supposed to be included in the seller’s inventory; not special order goods, these are normally held for sale by the company which are reserved to be sold to a specific customer) Conditional Sales - Goods in the possession of others such as goods in the hands of salespersons and agents, goods held by customers on approval, and goods held by others for storage, processing or shipment, are part of the inventory of the entity that owns the goods Installment Sales - Goods sold on an installment basis are recorded as sold when delivered and excluded from the inventory of the seller XQC - Despite retention of the title by the seller under the installment contract which only passes to the buyer when installment is fully paid, the substance of the transaction would pass the control of the goods from the seller to the buyer - Seller simply anticipates the completion of the contract and the ultimate passing of title, recognizing the transaction as a regular sale wherein the seller removes the inventory at the time of sale Goods sold with Buyback Arrangement - Goods sold with buyback arrangements are in effect used as collateral for a loan. The goods are included in the ending inventory of the transferor - In substance, a form of product financing arrangement - Nangutang si seller kay buyer tapos ginawang collateral yung goods. The owner of the goods sells the inventory to another party and agrees to repurchase the goods at a specific/specified price which covers all cost of inventory plus the related holding cost - In effect, the inventory is used as collateral for a loan obtained either directly from the buyer or from a financing company with the buyer as the intermediary. Thus, the customer does not obtain control of the asset, the ownership remains with the seller who retains the inventory in his books - Basically, the inventory/goods are included in the ending inventory of the seller/ transferor of the goods Goods sold with Refund Offers - Sellers of goods sold with refund offers recognize revenue for the transferred products. The recognition of revenue implies that the goods are removed from the inventory of the seller at their carrying amount - The goods are excluded in the ending inventory of the seller/ transferor of the goods Layaway Plans and Bill and Hold Sales - Customer pays a portion/fraction of the selling price of a merchandise and agrees to pay in installment or pay the full amount at a future date - Seller holds the merchandise and only delivers the goods upon full payment XQC - Seller recognizes revenue when the customer obtains control over the product, that is these conditions are met: 1. The product is identified separately as already belonging to a customer 2. The product must be ready for transfer to the customer 3. The seller does not have ability to use the product or to direct it to another customer - The recognition of revenue is made simultaneous to the derecognition of inventory XQC
