STATEMENT OF
FINANCIAL ACCOUNTING STANDARD
SFAS No.
14
INDONESIAN INSTITUTE OF ACCOUNTANTS
INVENTORIES
INVENTORIES
SFAS No. 14
Statement of Financial Accounting Standard (SFAS) No.14, Inventories, was adopted by a meeting
of the Indonesian Accounting Principles Committee on August 24, 1994 and was ratified by the
Executive Committee of the Association of Indonesian Accountants on September 7, 1994.
Compliance with the policies contained in this Statement is not obligatory in the case of immaterial
items.
Jakarta, September 7, 1994
Executive Committee
Association of Indonesian Accountants
Indonesian Accounting Principles Committee
Hans Kartikahadi
Jusuf Halim
Hein G. Surjaatmadja
Katjep K. Abdoelkadir
Wahjudi Prakarsa
Jan Hoesada
M. Ashadi
Mirza Mochtar
IPG. Ary Suta
Sobo Sitorus
Timoty Marnandus
Mirawati Soedjono
Chairman
Secretary
Member
Member
Member
Member
Member
Member
Member
Member
Member
Member
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INVENTORIES
SFAS No. 14
CONTENTS
paragraphs
INTRODUCTION..................................................................................................01-04
Objective
Scope..................................................................................................................01-02
Definitions...........................................................................................................03-04
EXPLANATION.....................................................................................................05-36
Measurement of Inventories.....................................................................................05
Costs of Inventories..................................................................................................06
Costs of Purchase................................................................................................07-08
Costs of Conversion............................................................................................09-11
Other Costs.........................................................................................................12-14
Costs of Inventories for Service Providers Service....................................................15
Techniques for Measuring Costs..........................................................................16-17
Cost Formulas.....................................................................................................18-21
Net Realizable Value...........................................................................................22-27
Recognition of Expense.......................................................................................28-30
Disclosure...........................................................................................................31-36
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 14
INVENTORIES......................................................................................................37-45
Effective Date..........................................................................................................45
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INVENTORIES
SFAS No. 14
INTRODUCTION
Objective
The objective of this Statement is to prescribe the accounting treatment for inventories
under the historical cost system. 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 Statement provides practical guidance on the determination of cost
and its subsequent recognition as an expense, including any write-down to net realizable
value. It also provides guidance on the cost formulas that are used to assign costs to
inventories.
Scope
01
This Statement must be applied in financial statements prepared in the context of
the historical cost system in accounting for inventory, other than:
(a)
work in progress arising under construction contracts (see SFAS No. 34,
Construction Contracts);
(b)
financial instruments; and
(c)
farming, other agricultural, forestry and mining inventories to the extent that they
are measured at net realizable value in accordance with industries generally
accepted practices.
02
The inventories in paragraph 1(c) are measured at net realizable value at a certain
stage of production. Inventories which are assured to be sold are not included.
Definitions
03
The terms used in this Statement are defined as follows:
Inventories are assets:
(a)
available for sale in the normal course of business;
(b)
in the process of production or in transit; or
(c)
in the form of materials or supplies to be used in the production process or
rendering of services.
Net realizable value is the estimated selling price less the estimated costs of
completion and the estimated costs necessary to complete the sale.
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SFAS No. 14
04
Inventories include merchandise, finished goods, goods in process and supplies
used in the production process. For service companies, as described in paragraph 15, for
which the company has not yet recognized the related revenue (SFAS No. 23, Revenue).
EXPLANATION
Measurement of Inventories
05
Inventories are measured at cost or net realizable value, whichever is lower.
Cost of Inventories
06
The cost of inventory includes all purchase amounts, conversion costs and other
costs incurred in bringing the inventories for sale and use.
Costs of Purchase
07
Purchase costs include the purchase price, the import duty and other taxes (except
for restitutive taxes from tax office), freight handling and other costs directly attributable
to the materials and services. Trade discounts, rebates and other similar items are
deducted to determine the purchase cost.
08
Purchase costs may include foreign exchange differences in the rare
circumstances permitted in the allowed alternative treatment described in SFAS No. 10,
Transactions in Foreign Currencies. Devaluation or depreciation of foreign currency
which is material, and cannot be hedged is recognized. If no hedge is used before
devaluation, the exchange difference may not be included as part of the purchase cost.
Costs of Conversion
09
The costs of conversion of inventories include costs directly related to the units of
production, such as direct labor. They also include a systematic allocation of fixed and
variable production overheads that are incurred in converting materials in to 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 labor.
10
Fixed overhead production costs are based on the normal capacity of the
production facility. Normal capacity is the average production expected in a period,
taking into account the lost capacity during planned maintenance.
11
The production process may produce by-products. If the conversion cost can not
be identified, the cost will be allocated on a rational and consistent basis. Principally, by-
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SFAS No. 14
products are not material and are therefore valued based on net realizable value. This
value can be deducted from the cost of the main product.
Other Costs
12
Other costs are included in the costs of inventories only to the extent that they are
incurred in bringing the inventories to their present location and condition.
13
Some examples of costs taken from inventory cost and recognized as expense are:
(a)
abnormal amounts of wasted materials, wages and other production costs;
(b)
storage costs, unless these costs are needed in the production process to continue
on to a further stage in production;
(c)
general and administration costs which do not immediately contribute to bringing
inventories to their present location or condition; and
(d)
selling costs.
14
Borrowing costs are included as costs of inventories in accordance with this
Statement.
Cost of Inventories for Service Providers
15
The cost of inventories for service providers primarily consists of wages and
personnel costs directly engaged in providing the service, including supervisory
personnel and attributable overheads. Labor and other costs relating to sales and general
administrative personnel are not included, but are recognized as expenses in the period in
which they are incurred.
Techniques for Measuring Costs
16
The standard cost measurement technique or retail method may be used if the
results approximate historical cost. Standard costs must be reviewed and revised in light
of current conditions.
17
The retail method is used in the retail industry for merchandise with high turnover
and similar margins. The cost of inventory is determined by reducing the sales volume by
the appropriate percentage gross margin. The percentage used takes into consideration
inventory which has been marked down to below the original selling price.
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SFAS No. 14
Cost Formulas
18
Inventory costs for goods or services procured for a special project must be
calculated based on the specific identification of each cost.
19
Specific cost is attributed to inventory goods used in special projects that are not
interchangeable.
20
Inventory costs, except for specific costs, must be calculated using FIFO, the
weighted average cost method, or LIFO.
21
The FIFO formula assumes goods produced or purchased first will be sold first or
used. Consequently, items remaining in inventory at the end of the period are the most
recently purchased or produced. Under the weighted average cost formula is the cost of
each good is determined from the weighted expense of cost of a similar good at the
beginning of a period and the cost during the period. The LIFO formula assumes goods
produced or purchased last will be the first sold or used. The inventory is made up of
goods purchased or produced beforehand.
Net Realizable Value
22
Lowering the inventory value below the net realizable value is consistent with the
view that assets should not be carried in excess of amounts expected to be realized from
their sale or use.
23
Each type of inventory is usually individually written down to its net realizable
value, although in some circumstances it may be appropriate to group similar goods (i.e.
a market in the same region). The write down would be inappropriate if calculated based
on inventory classification. Service companies generally accumulate costs in respect of
each service for which a separate selling price will be charged, therefore each such
service is treated as a separate item.
24
Estimates of net realizable value are based on the realizable inventory amount. It
also considers price fluctuations or direct costs related to post period events if the events
confirm the condition at the end of the period.
25
Contingent losses from sales contracts which exceed the quantity of owned
inventory and contingent losses from purchase agreements are treated in accordance with
SFAS No. 8, Contingencies and Events Occurring After the Balance Sheet Date.
26
Raw material value and other supplies used in inventory production are not
reduced below cost if the finished goods are expected to be sold at or above cost. If a
decline in the value of raw materials indicates that the cost of finished goods will exceed
net realizable value, the cost of raw materials are written down to net realizable value. In
such circumstance, the best measurement for net realizable value is replacement cost.
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27
SFAS No. 14
The determination of net realizable value must be reviewed periodically.
Recognition as an Expense
28
When inventories are sold, the recorded inventory value must be recognized as
expense in the period in which the related income is recognized. Every decline in net
realizable value or loss in inventory must be recognized as expense in the period the
decline or loss arises. Each increase of net realizable value must be recognized as
reducing the total inventory expense in the recovery period.
29
The process of recognizing as expense the carrying amount of inventories sold
results in the matching of costs and revenues.
30
Some inventories may be allocated to other asset accounts, for example. inventory
used as a component of self-constructed property, plant or equipment. These inventories
are recognized as an expense during the useful life of the asset.
Disclosure
31
The financial statements must disclose:
(a)
the accounting policies adopted in measuring inventories, including the cost
formula used;
(b)
the total carrying amount of inventories and the carrying amount in classifications
appropriate to the enterprise;
(c)
the carrying amount of inventories carried at net realizable value;
(d)
the amount of any reversal of any write-down that is recognized as income in the
period in accordance with paragraph 28;
(e)
the cause of the reversal of a write-down in accordance with paragraph 28; and
(f)
the carrying amount of inventories pledged as security for liabilities.
32
Information about carrying amounts held in different classifications of inventories
and the extent of the changes in these assets is useful to financial statement users.
33
The financial statements should disclose either:
(a)
the cost of inventories recognized as expense during the period; or
(b)
the operating costs, applicable to revenues, recognized as an expense during the
period, classified by their nature.
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SFAS No. 14
34
The cost of inventories recognized as an expense during the period consists of
those costs previously included in the measurement of the items of inventory sold and
unallocated production overheads and abnormal amounts of production costs of
inventories. The circumstances of the enterprise may also warrant the inclusion of other
costs, such as distribution costs.
35
Some enterprises adopt a different format for the income statement which results
in different amounts being disclosed instead of the cost of the inventories recognized as
an expense during the period. Under this different format, an enterprise discloses the
amounts of operating costs, applicable to revenues for the period, classified by their
nature. In this case, the enterprise discloses the costs recognized as an expense for raw
materials and consumable, labor costs and other operating costs together with the amount
of the net change in inventories for the period.
36
A write-down to net realizable value may be of such size, incidence or nature to
require disclosure under SFAS No. 25, Net Profit or Loss for the Period, Fundamental
Errors and Changes in Accounting Policies.
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SFAS No. 14
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NUMBER 14
INVENTORIES
Statement of Financial Accounting Standard No. 14 consists of paragraphs 37-45.
This Statement should be read in the context of paragraphs 1-36.
37
This Statement must be applied in financial statements prepared in the context of
the historical cost system in accounting for inventory, other than:
a)
work in progress arising under construction contracts (see SFAS No. 34,
Construction Contracts);
(b)
financial instruments; and
(c)
farming, other agricultural, forestry and mining inventories to the extent that they
are measured at net realizable value in accordance with industries generally
accepted practices.
38
Inventories are measured at cost or net realizable value, whichever is lower
39
The cost of inventories includes all purchase amounts, conversion costs and other
costs incurred in bringing the inventories for sale and use.
40
Inventory for special projects must be calculated based on specific costs.
41
Inventory costs, except for specific costs, must be calculated using FIFO, the
weighted average cost method, or LIFO.
42
When inventories are sold, the recorded inventory value must be recognized as
expense in the period in which the related income is recognized. Every decline in net
realizable value or loss in inventory must be recognized as expense in the period the
decline or loss arises. Each increase of net realizable value must be recognized as
reducing the total inventory expense in the recovery period.
43
The financial statements must disclose:
(a)
the accounting policies adopted in measuring inventories, including the cost
formula used;
(b)
the total carrying amount of inventories and the carrying amount in classifications
appropriate to the enterprise;
(c)
the carrying amount of inventories carried at net realizable value;
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SFAS No. 14
(d)
the amount of any reversal of any write-down that is recognized as income in the
period in accordance with paragraph 28;
(e)
the cause of the reversal of a write-down in accordance with paragraph 28; and
(f)
the carrying amount of inventories pledged as security for liabilities.
44
The financial statements should disclose either:
(a)
the cost of inventories recognized as expense during the period; or
(b)
the operating costs, applicable to revenues, recognized as an expense during the
period, classified by their nature.
Effective Date
45
This Statement becomes effective for financial statements covering periods
beginning on or after January 1, 1995. Earlier application is encouraged.
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