Inventories-Subsequent-Measurement PDF

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INVENTORIES – SUBSEQUENT MEASUREMENT

Concepts – Cost Flow Assumptions Subsequent to initial recognition, the cost of ending inventory (and the complement costs of goods sold) shall be determined using the following cost flow assumptions:   

Specific identification First-in, first-out or FIFO (perpetual and periodic) Average (weighted average and moving average)

Specific Identification Method This method shall be used when the inventory items are not ordinarily interchangeable and goods or services are produced and segregated for specific projects. Under this method, specific costs are attributed to identify items of inventory (i.e., physical flow matches the cost flow).

Inventory items that do not meet the characteristics for the use of specific identification method shall be accounted for using either FIFO or average method as accounting policy choice.

FIFO Method The FIFO formula assumes that the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those purchased earlier during the period. FIFO method using perpetual inventory system or periodic inventory system will yield the same results.

Average Method Under this method, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. There are two ways of computing the average cost, weighted average and moving average.

The weighted average method is an application of periodic inventory system. Under this method, the average cost per unit is computed on a periodic basis. Cost of ending inventory is

computed as number of units in ending inventory multiplied by average cost while cost of goods sold is computed as number of sold units multiplied by the average cost. The moving average method is an application of perpetual inventory system. Under this method, the average cost is revised after each additional purchase/sales return has been received. Cost of goods sold is computed right after each sale based on the current average cost of inventory.

Accounting Policy on Cost Flow Assumption 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.

Concepts – Lower of Cost and Net Realizable Value Inventories shall be measured at the lower of cost and net realizable value. Cost is determined by applying the rules on cost flow assumptions while net realizable value (NRV) is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Costs of completion are relevant to unfinished goods.

If the inventory’s NRV is lower than its cost, a loss on inventory write-down shall be recognized in profit or loss. Decrease in NRV may arise from the following: obsolescence, decrease in general selling prices, increase in costs to sell and/or to complete, etc. Generally, NRV is compared with the related cost on an item-by-item basis.

A subsequent increase in NRV is recorded as a gain on reversal of inventory write-down, but is limited to the amount of previously recognized loss on inventory write-down.

Concepts – Purchase Commitments By entering into a purchase commitment, an entity binds itself to purchase a certain number of units at a specified price (i.e., commitment price) on a specified date. If the commitment price is higher than the current value of the inventory, a loss on purchase commitment shall be recognized, provide the purchase commitment is noncancellable. The corresponding credit is a liability from purchase commitment.

Any subsequent increase in the value of the inventory shall be recognized as a gain and as a reduction of liability from purchase commitment. This gain is limited to the amount of previously recognized loss on purchase commitment....