11. NET REALISABLE VALUE
There is a risk that inventories will be
sold for less than their cost.
Reasons include:
- General fall in market prices for the
goods.
- Damage to the goods.
- Obsolescence.
- Additional costs needed to complete
manufacture.
(Please see the following 4 examples)
|
You purchase 100 barrels of oil @ $40 per
barrel, as a speculative purchase
The price
falls to $25 per barrel at period end, and no oil has been sold. Reduce the
value to $25 per barrel, and recognise a $1.500 net realisable
adjustment as an expense immediately.
|
|||
|
|
I/B
|
DR
|
CR
|
|
Inventory
|
B
|
40.000
|
|
|
Cash
|
B
|
|
40.000
|
|
Inventory
|
B
|
|
1.500
|
|
Inventory loss
|
I
|
1.500
|
|
|
Revaluation of inventory to net realisable
value
|
|
|
|
|
Example:
You are selling machines that cost you
$100 each.
A fire damages 30 of your machines.
You can sell them as scrap for $10.
Reduce the value of the 30 machines to
$10, and recognise a $2700 (30*$90) net realisable adjustment as an expense
immediately.
|
|
You purchase 100 barrels of oil @ $40 per
barrel, as a speculative purchase
The price
falls to $25 per barrel at period end, and no oil has been sold. Reduce the
value to $25 per barrel, and recognise a $1.500 net realisable
adjustment as an expense immediately.
|
|||
|
|
I/B
|
DR
|
CR
|
|
Inventory
|
B
|
40.000
|
|
|
Cash
|
B
|
|
40.000
|
|
Inventory
|
B
|
|
1.500
|
|
Inventory loss
|
I
|
1.500
|
|
|
Revaluation of inventory to net realisable
value
|
|
|
|
|
You are selling cars that cost you $5.000
each.
New legislation is introduced that
requires all vehicles to have new emission controls.
These will cost $2000 per car, but the
selling price will only be $6500 per car. This will generate a loss of $500
per car. You have 30 cars in stock
Recognise a
$500 per car net realisable adjustment as an expense immediately.
|
|||
|
|
I/B
|
DR
|
CR
|
|
Inventory
|
B
|
|
15.000
|
|
Inventory loss
|
I
|
15.000
|
|
|
Revaluation of inventory to net realisable
value
|
|
|
|
If the price at which inventories will be
sold is less than the current cost, allowing for completion costs, the value of
the inventory will be reduced to its net realisable value.
This recognises the future loss
immediately.
|
Example: net realisable
value-repackaging
You are selling cans of beans to a
supermarket. You have 2.000 cases in stock
The client changes its packaging, and
requires you to repackage your current inventory, without compensation.
You will incur a loss of $7 for every
case of cans in your inventory.
Reduce the
value of inventory by $7 per case as a net realisable value adjustment, and
recognise the loss immediately as an expense.
|
|||
|
|
I/B
|
DR
|
CR
|
|
Inventory
|
B
|
|
14.000
|
|
Inventory loss
|
I
|
14.000
|
|
|
Revaluation of inventory to net realisable
value
|
|
|
|
Items should be reviewed individually for
write-downs to net realisable value.
|
Example: net realisable value-review
items individually
You sell packets of coffee and tea. The
market price of coffee falls below your cost price. You will make a loss of
$86.000 on your current stock.
The market price of tea rises dramatically.
You will make a profit of $100.000 on your current stock.
Though you will make a loss on your
inventory of coffee, you will more than compensate for the loss with the
extra profit you make from the sale of your inventory of tea.
A write-down
of the coffee to net realisable value is still required.
|
|||
|
|
I/B
|
DR
|
CR
|
|
Inventory-coffee
|
B
|
|
86.000
|
|
Inventory loss
|
I
|
86.000
|
|
|
Revaluation of coffee inventory to net
realisable value
|
|
|
|
Inventories are usually written down to net
realisable value item by item.
In some circumstances, however, it may be
appropriate to group similar or related items. This may be the case with items
of inventory relating to the same product line that have similar purposes or
end uses, are produced and marketed in the same geographical area, and cannot
be practicably evaluated separately from other items in that product line.
Service providers generally accumulate
costs in respect of each service for which a separate selling price is charged.
Therefore, each such service is treated as a separate item.
Estimates of net realisable value should be
based the best evidence available. Events after the period that have an impact
on price or costs should be taken into account.
|
Example: net realisable value-after
the balance sheet date
You purchase 100 barrels of oil @ $30 per
barrel, as a speculative purchase (you have no contract to sell the oil).
The price falls to $25 per barrel at
period end, and no oil has been sold.
The price falls to $20 per barrel just
before the accounts are to be approved. Still no oil has been sold.
Reduce the
value to $20 per barrel, and recognise a $1000 net realisable adjustment as
an expense immediately.
|
|||
|
|
I/B
|
DR
|
CR
|
|
Inventory
|
B
|
|
1.000
|
|
Inventory loss
|
I
|
1.000
|
|
|
Revaluation of inventory to net realisable
value after the balance sheet date
|
|
|
|
Where inventories are only going to be used
for existing contracts, the selling prices of those contracts are the bases for
decisions.
|
Example: net realisable value-contract
price
You purchase 10.000 barrels of oil @ $30
per barrel. At the end of the period,
you have a contract to sell all barrels @ $29 per barrel. The market price is
$27 per barrel.
Reduce the value to $29 per barrel, and
recognise $10.000 net realisable adjustment as an expense immediately.
Ignore the
market price, as you will not be selling in the market.
|
|||
|
|
I/B
|
DR
|
CR
|
|
Inventory
|
B
|
|
10.000
|
|
Inventory loss
|
I
|
10.000
|
|
|
Revaluation of inventory to net realisable
value: contract price
|
|
|
|
Where inventories are more than those
needed to fulfil existing contract orders, general selling prices should be
considered for the valuation of the extra inventory.
|
Example: net realisable value-contract
price and market price
You purchase 100 barrels of oil @ $30 per
barrel. At the end of the period, you
have a contract to sell 90 barrels @ $29 per barrel. The market price is $27
per barrel.
Reduce the
value of 90 barrels to $29 per barrel, 10 barrels to $27 and recognise
$120($90+$30) net realisable adjustment as an expense immediately.
|
|||
|
|
I/B
|
DR
|
CR
|
|
Inventory
|
B
|
|
120
|
|
Inventory loss
|
I
|
120
|
|
|
Revaluation of inventory to net realisable
value: contract price and market price
|
|
|
|
Materials used in production are not
written down below cost, if the finished goods (in which they will be
incorporated) will be sold at a profit.
|
Example: no write down when goods will
be sold at a profit
You have a stock of components, worth
$1,2m. The market value of the components falls to $1m, but all your finished
goods that use those components remain profitable. No write down of the value
of components is necessary.
|
If the price of the finished goods does
decline, as the result in the fall in the price of materials, then the
materials will be written down in value. The replacement costs of the materials
may be the best valuation of their net realisable value.
|
Example: net realisable value of
finished goods falls
You produce machines, in which the most
expensive part is the semiconductors.
Semiconductors cost you $5 per set. The
market price falls to $2 per set, and the price of your machine is cut by
60%. You have 40.000 sets in stock.
Losses will be
made on all sales of finished goods in inventory. The sets of semiconductors
currently in inventory should be reduced in value by $3 to $2 per set.
|
|||
|
|
I/B
|
DR
|
CR
|
|
Inventory
|
B
|
|
120.000
|
|
Inventory loss
|
I
|
120.000
|
|
|
Revaluation of inventory to net realisable
value: market price of finished goods falls
|
|
|
|
REVIEWS OF NET REALISABLE VALUE
A review of net realisable value of ALL
inventory should be made in each period. Where selling prices have improved and
written-down items remain in inventory, write-downs can be partly or wholly reversed.
The new carrying value is the lower of cost
and net realisable value.
No comments:
Post a Comment