Inventories - aasb.gov.au

1 Accounting StandardAASB 1019 March 1998 InventoriesIssued by theAustralian Accounting Standards BoardAASB 10192 Obtaining a Copy of this Accounting StandardCopies of this Standard are available for purchase from the AustralianAccounting Standards Board by contacting:The Customer Service OfficerAustralian Accounting Research Foundation211 Hawthorn RoadCaulfield Victoria 3162 AUSTRALIAP hone:(03) 9524 3600 Fax:(03) 9523 1998 Australian Accounting Standards Board. The copying of thisStandard is only permitted in certain circumstances. Enquiries should bedirected to the Australian Accounting Standards Board.`ISSN 1036-4803 AASB 10193 CONTENTSCONTENTSMAIN FEATURES OF THE STANDARD .. page 5 Section and page number1 Application .. 62 Scope .. 63 Operative Date .. 74 Purpose of Standard .. 75 Inventory Measurement .. 86 Determining Cost .. 8 production Overheads .. 8 Standard Costs.

2 10 Retail Inventory Method .. 10 Exceptional Wastage .. 11 Joint Products and By-Products .. 117 Assigning Costs to Inventories .. 128 Net Realisable Value .. 13 Spares .. 14 Materials, Consumable Stores andSupplies .. 14 Firm Sales Contract Price .. 15 Replacement Cost .. 159 Recognition as an Expense .. 15 Net Realisable Value Write-downs and OtherLosses .. 15 Reversal of Net Realisable ValueWrite-downs .. 1610 Disclosures .. 1611 Comparative Information .. 1712 Transitional Provisions .. 17 AASB 10194 CONTENTS13 Definitions .. 18 Inventories .. 21 Inventories and Service Providers .. 21 Other production Costs .. 22 General Administration Costs .. 22 Other Costs .. 22 CONFORMITY WITH INTERNATIONAL AND NEWZEALAND ACCOUNTING STANDARDS .. page 23 BACKGROUND TO REVISION .. page 24 TABLE OF COMPARATIVE PARAGRAPHS .. page 27 Defined words appear in italics the first time they appear in asection.

3 The definitions are in Section 13. Standards are printedin bold type and commentary in light 10195 FEATURESMAIN FEATURES OF THE STANDARDThe Standard:(a) requires Inventories to be measured at the lower of cost and netrealisable value(b)defines Inventories , cost of Inventories and net realisablevalue (c)requires the cost of Inventories of items that are not ordinarilyinterchangeable or that are goods or services produced andsegregated for specific projects to be assigned by using specificidentification of their individual costs, and the cost of otherinventories to be assigned by using the first-in-first-out or weightedaverage cost formulas(d)prescribes the manner and circumstances in which write-downs tonet realisable value are recognised(e)requires specific disclosures in relation to 10196 STANDARD AASB 1019 The Australian Accounting Standards Board makes Accounting StandardAASB 1019 Inventories under section 32 of the Corporations Act H SpencerDated 25 March 1998 Director AASBACCOUNTING STANDARDAASB 1019 Inventories Standard applies to each entity which is required to preparefinancial statements in accordance with Part of theCorporations Law and which:(a)is a reporting entity.

4 Or(b) holds those financial statements out to be, or form partof, a general purpose financial Standard applies to Inventories other than:(a) Inventories that are self-generating and regeneratingassets(b) Inventories arising under construction contracts,including directly related service contracts (as definedin Accounting Standard AASB 1009 ConstructionContracts )(c)financial instruments, as defined in AccountingStandard AASB 1033 Presentation and Disclosure ofFinancial Instruments .AASB 10197 this Standard does not apply to Inventories that are self-generating and regenerating assets, it does apply to the non-livingproduce derived from self-generating and regenerating assets such asfelled standards specified in this Standard apply to the financial reportwhere information resulting from their application is material, inaccordance with Accounting Standard AASB 1031 Materiality.

5 3 Operative Standard applies to financial years ending on or after30 June Standard may be applied to financial years ending before30 June 1999 where an election has been made in accordancewith subsection 285(3) of the Corporations operative, this Standard supersedes Accounting StandardAASB 1019 Measurement and Presentation of Inventories inthe Context of the Historical Cost System as approved bynotice published in Gazette No. S 338 on 30 October 1989 andamended by Accounting Standard AASB 1025 Application ofthe Reporting Entity Concept and Other Amendments . of this Standard was published in the Commonwealth ofAustralia Gazette on 26 March of purpose of this Standard is to:(a)specify the method of measuring Inventories , includingthe manner in which costs are to be assigned toinventories(b)specify the recognition of expenses relating toinventories(c)require specific disclosures to be made in relation 10198 Subject to paragraph , Inventories must be measured at thelower of cost and net realisable value on an item by item it is impracticable to measure items of inventoryseparately because there are a large number of homogeneousitems of inventory each having an insignificant cost, must be applied to groups of such must not have a carrying amount in excess of amountsexpected to be recovered in the ordinary course of , where the cost of an inventory item exceeds the netrealisable value of that item, the cost is written down to netrealisable comparison of cost and net realisable value is made separatelyin respect of each item of inventory.

6 However, in somecircumstances it is appropriate to group similar or related may be the case with items of inventory relating to the sameproduct line that:(a)have a similar nature or function(b)are produced and marketed in the same geographical area(c) cannot be practicably evaluated separately from other itemsin that product question separate from and additional to the determination of costis the assignment of costs to the inventory quantities held atreporting date. Assigning costs to Inventories is dealt with inSection 7 of this CostProduction overheads that relate to bringing Inventories to theirpresent location and condition must be systematically allocatedin determining the cost of Inventories . The systematic allocationof those production overheads must be based on the normaloperating capacity of the production 10199 overheads are those indirect costs of production ,preparation or conversion that cannot be identified specifically ortraced to the goods or services being produced in an economicallyfeasible manner.

7 They are often allocated to Inventories using costdrivers. Variable production overheads vary directly, or nearlydirectly, in proportion to changes of a cost driver. For example,variable production overheads such as indirect materials and indirectlabour may vary in proportion to increased production volume, andvariable production overheads such as setup costs may vary inproportion to the number of setups performed for each costs of conversion that are fixed production overheads, such asdepreciation and maintenance of factory buildings, remain relativelyconstant in total and are allocated to each item of inventory on thebasis of normal operating capacity of the production facilities. Theamount of fixed overhead allocated to each item of inventory is notincreased as a consequence of low production or idle overheads are recognised as an expense in the period inwhich they arise.

8 In periods of abnormally high production , theamount of fixed overhead allocated to each item of inventory isdecreased so that Inventories are not measured above operating capacity is the production expected to be achievedon average over a number of periods or seasons under normalcircumstances, taking into account the loss of capacity resultingfrom planned maintenance. The actual level of production may beused to allocate fixed production overheads if it approximatesnormal operating capacity. In determining what constitutes normaloperating capacity, the following factors are considered:(a)the volume of production which the production facilities areintended by their designers and by management to yieldunder the working conditions (for example, single or doubleshift) normally prevailing(b)the budgeted level of activity for the current financial yearand for the ensuing financial year(c)the level of activity achieved both in the current financialyear and in previous financial temporary changes in the level of activity may be ignored,persistent variation may result in a revision of the previous 101910 standard costs are used as a basis for determining the costof Inventories , those standard costs must be.

9 (a)realistically attainable(b)reviewed regularly(c)revised to reflect current cost of Inventories determined must be adjusted forsignificant cost variances caused by changes in material prices,labour rates, manufacturing expenses or operating conditions tothe extent that such variances directly relate to Inventories costs are predetermined product costs established frombases such as:(a)planned products and/or operations(b)planned cost and efficiency levels(c)expected capacity be acceptable for inventory measurement, standard costs shouldbe realistically attainable and be reviewed regularly and revised toreflect actual costs. Balances in cost variance accounts may affectthe measurement of Inventories on hand as at reporting date andtheir treatment will depend upon the nature and causes of thevariances. In most cases, where standards have been properly setand maintained, variances from standards are accounted for as arevenue or an expense in the financial year when they arise.

10 Wherechanges in the prices of materials, labour rates, manufacturingexpenses or operating conditions give rise to significant variances,these variances are apportioned between cost of Inventories sold Inventory retail inventory method can only be used to determine thecost of Inventories when it results in an amount reasonablyapproximating the lower of cost and net realisable 101911 the cost of Inventories in merchandising businesses canbe difficult where the inventory comprises a large number of itemswith a high rate of turnover and the cost of individual items is oftennot readily obtainable. Under these circumstances a method widelyfollowed, and known as the retail inventory method , produces ameasure of inventory which normally approximates the lower of costand net realisable The retail inventory method involves the discounting of the sellingvalue (that is, value at current selling prices after mark-downs, ifany) of the total inventory in a merchandise department, orclassification, by the current average mark-up in that department, orclassification, expressed as a percentage of the selling price.