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 DEFINITIONS- INVENTORIES
a) Held for sale in the ordinary course of business;

b)Goods purchased or produced by an entity , which are for distribution to other

parties for no charge or for a nominal charge .EG Educational books produced

by a health authority for donations to schools.

c) In the process of production for sale or distribution

d) In the form of materials or supplies to be consumed in the production process or

distributed in the rendering of services.

e)In the case of a service provider, Inventory includes the cost of service

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 OBJECTIVE AND SCOPE
OBJECTIVE:
The objective of this Standard is to prescribe the accounting treatment for
inventories.
SCOPE:

IPSAS 12 applies to all inventories, expect:

a) Work in progress arising under construction contracts, including directly
related service contracts (IPSAS 11 Construction Contracts)
b) Financial instruments (IPSAS 28 Presentation &29 Recognition
&Measurement )
c) Biological assets related to agricultural activity and agricultural produce
at the point of harvest (IPSAS 27Agriculture)

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 INVENTORY IN THE PUBLIC SECTORS

 Military inventories

 Consumable stores

 Maintenance materials

 Spare parts for plant &Equipment

 Strategic stock piles (E.G Energy reserve or medicine)

 Work in process includes:

 Educational/training course materials

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 DEFINITION - NET REALIZABLE VALUE / FAIR VALUE

• Net Realizable Value: is the estimated selling price in the ordinary

course of operations less the estimated costs of completion and the
estimated costs necessary to make the sale, exchange or

distribution.

• Fair Value: is the amount for which an asset could be exchanged,

or a liability settled, between knowledgeable, willing parties in an
arm’s length transaction( marketplace).  

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 DEFINITION - NET REALIZABLE VALUE / FAIR VALUE

• Current Replacement cost - the entity would incur to acquire the

assets on the reporting date.
• Exchange transactions- are transactions in which one entity
receives assets or services, or has liabilities extinguished, and
directly gives approximately equal value (primarily in the form of
cash, goods, services, or use of assets) to another entity in
exchange.
• Non-exchange transactions- are transactions that are not exchange
transactions. In a non-exchange transaction, an entity either
receives value from another entity without directly giving
approximately equal value in exchange, or gives value to another
entity without directly receiving approximately equal value in
exchange.
 
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 MEASUREMENT
• Inventories shall be measured at the lower of cost and net
realizable value.

• Where inventory are acquired through a non-exchange

transactions, their cost shall be measured at their fair value as
at the date of acquisition.

• E.g. an international aid agency may donate medical supplies

to a public hospital in the aftermath of a natural disaster. The
cost of inventory is its fair value as at the date it is acquired .

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 CONT…
• Inventors shall be measured at the lower of cost and current replacement
cost where they are held for:

 Distribution at no charge or for nominal charge or

 Consumptions in the production process of goods to be distributed at no

charge or for a nominal charge

• The cost of inventories shall comprise all costs of purchase, cost of

conversion and other costs incurred in bringing the inventories to their present
location and condition.

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 COST OF INVENTORIES

• The cost of inventories shall comprise all costs of purchase, cost

of conversion and other costs incurred in bringing the
inventories to their present location and condition.

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 COST OF PURCHASE

 The cost of purchase of inventories comprise the purchase price,

import duties and other taxes, transport, handling and other costs
directly attributable to the acquisition of finished goods,
materials and services.

 Trade discounts, rebates and other similar items are deducted in

determining the cost of purchase.

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 COST EXAMPLE
 An inventory was purchased by at a price of birr 36,000 with
term 2/10, n/30. Payment of the invoice was made within the
discount period ; transportation charge of birr 430 and labor cost
of birr 760 for loading and unloading. During loading &
unloading some of the inventory damaged due to carelessness.
Repair of the damage parts cost birr 2,180.

What is the cost basis for the inventory ?

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 COSTS OF CONVERSION
• 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 into finished
goods.
• The allocation of fixed production overheads to the costs of
conversion is based on the normal capacity of the production
facilities. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of low production or
idle plant.
• Normal capacity is the production expected to be achieved on
average over a number of periods or seasons under normal
circumstances

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 COSTS ITEMS EXCLUDED FROM COST OF
INVENTORIES

A. Abnormal amounts of wasted materials, labor or other

production costs

B. Storage costs, unless those costs are necessary in the production

process before a further production stage

C. Administrative overheads

D. Selling costs

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 COST FORMULAS
• The cost of inventories of items that are not ordinarily
interchangeable and goods or services produced and
segregated for specific projects shall be assigned by using
specific identification of their individual costs.
• The First-in, First out (FIFO)
• Weighted average cost formula
• 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.

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 PROVISION FOR INVENTORY IMPAIRMENT
 The cost of inventories may not be recoverable if those inventories
are damaged, if they have become wholly or partially obsolete, or
if their selling prices have declined.
 The cost of inventories may also not be recoverable if the
estimated costs of completion or the estimated costs to be incurred
to make the sale have increased. The practice of writing
inventories down below cost to 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.

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 PROVISION FOR INVENTORY
IMPAIRMENT
• Materials and other supplies held for use in the production of
inventories are not written down below cost if the finished products
in which they will be incorporated are expected to be sold at or
above cost.

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 PROVISION FOR INVENTORY
IMPAIRMENT
Example-
1. A wardrobe that cost the company £720 and normally sells for
£995. The wardrobe has been damaged and will cost
approximately £120 to repair at which point it can be sold for
£750.
2. A dresser that was made to a customer’s own specifications and
cost the company £1,832 to make. Unfortunately, the customer
went bankrupt and could not purchase the item. Due to the unusual
design the dresser was not easy to sell. After the yearend however,
the company sold the dresser for £2,250 but incurred commission
costs on the sale of £105 and delivery costs of £158

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 PROVISION FOR INVENTORY
IMPAIRMENT
Answer-
1. Wardrobe: cost is £720
NRV: expected selling price less repair cost (£750 - £120) i.e.
£630
This item should be valued at £630 (NRV)
2. Dresser: cost is £1,832
NRV: expected selling price less commission less delivery costs
(£2250 less £105 less £158) i.e. £1,987
This item should be valued at £1,832 (cost)

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 DISCLOSURE
• The accounting policies adopted in measuring inventories,
including the cost of formula used,
• The total carrying amount of inventories and the carrying
amount in classifications appropriate to the entity,
• The carrying amount of inventories carried at fair value less
costs to sell,
• The amount of inventories recognized as an expense during
the period,

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 DISCLOSURE
• The amount of any write-down of inventories recognized as
an expense in the period,
• The amount of any reversal of any write-down that is
recognized as a reduction, in the amount of inventories
recognized as expense,
• The circumstances or events that led to the reversal of a
write-down of inventories,
• The carrying amount of inventories pledged as security for
liabilities.

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 RECOGNITION AS AN EXPENSE
• When inventories are sold, the carrying amount of those
inventories shall be recognized as an expense in the period in
which the related revenue is recognized.
• The amount of any write-down of inventories to net realizable
value and all losses of inventories shall be recognized as an
expense in the period the write-down or loss.
• The amount of any reversal of any write-down of inventories,
arising from an increase in net realizable value, shall be
recognized as a reduction in the amount of inventories
recognized as an expense in the period in which the reversal
occurs.

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 RECOGNITION AS AN EXPENSE FOR A SERVICE PROVIDER

• The point when inventors are recognized as expenses normally

occurs when services are rendered, or upon billing for
chargeable services.

• Some inventories may be allocated to other assets. e.g. inventory

used as a component of self-constructed property, plant or
equipment .Inventory allocated to another assets in this way are
recognized as an expenses during the useful life of that assets

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 COMPASSION WITH IPSAS12&IAS2

 IPSAS 12 recognizes that in the public sector some inventories are distributed at no
charge or for a nominal charge

 IPSAS 12 requires that where inventors are acquired through a non-exchange

transaction, their cost is fair value as at the date of accusations

 IPSAS 12 Statement of Financial Performance whereas IAS 2 SPLOCI

 IPSAS 12 Use the term Revenue whereas IAS 2 use the term Income

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