DEFINITIONS
Inventories
Inventories are assets that are:
held for sale
being prepared for sale
materials to be used in the production
process or provision of services.
In the case of the provision of services,
inventories include the cost of unbilled services, (similar to work in progress).
Net Realisable Value
Net realisable value is the estimated
selling price, in the ordinary course of business, less costs of completion,
and less selling costs.
Fair Value
Fair value is the value for which an asset
could be sold, or a liability extinguished, between willing independent
traders.
Net realisable value relies on the specific
business of the firm that is the subject of the financial statements. Fair
value relates to the market, rather than to individual contracts. Net
realisable value may not be related to the market price, when the firm is
supplying goods to clients at contract prices that no longer match market
prices.
In the following examples, I/B
refers to Income Statement and Balance Sheet.
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You have a contract to supply 100 barrels
of oil at $25 per barrel. The price is fixed for the 2 months. At the end of
the 1st month the market price of oil is $30. (The fair value is $30.) You
buy the 100 barrels at the market price.
Your net realisable value is $25, less
selling costs. You record the loss.
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I/B
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DR
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CR
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Inventory
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B
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3.000
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Cash
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B
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3.000
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Inventory
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B
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500
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Inventory loss
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I
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500
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Revaluation of inventory to net realisable
value
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Measurement
Inventories must be measured at the lower
of cost and net realisable value.
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