Section 12: Inventories (AASB1061_04-26)

This section applies to inventories. Inventories are assets: 

(a) in the form of materials or supplies to be consumed in producing goods or rendering services; 

(b) held for sale or distribution in the ordinary course of operations; or 

(c) in the process of production for such sale or distribution.

An entity’s inventories might include food, clothing or goods held for distribution, stocks held in charity shops, information brochures, goods purchased for resale, consumable stores, maintenance materials, spare parts for plant and equipment, and work-in-progress.

Inventories are recorded as an asset when they are purchased by, or donated to, the entity.

An entity shall measure inventories at cost. However, where a condition set out in paragraph 22.2 for assessing impairment is present, the entity shall measure: 

(a) inventories held for distribution – at cost less any loss of service potential; and 

(b) all other inventories – at the lower of cost and estimated selling price less costs to complete and sell.

For the purposes of applying paragraph 12.4 for each item of inventory donated to the entity, the entity may elect to initially measure the cost of that item either at: 

(a) its cost to the entity (which might be nil, a nominal amount or another significantly discounted amount); or 

(b) its current replacement cost as at the date of donation. Any resulting increase in inventory is recorded as donation income (revenue) in accordance with Section 20.

An entity shall include in the cost of inventories all costs incurred in bringing the inventories to their present location and condition, including costs of purchase and, for inventories produced by the entity, costs of conversion (eg costs of converting raw materials and labour into finished goods). 

The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities) and 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 costs of purchase.

Examples of costs excluded from the cost of inventories and recorded as expenses in the reporting period in which they are incurred are: 

(a) abnormal amounts of wasted materials, labour or other production costs; 

(b) storage costs, unless those costs are necessary during the production process before a further production stage; 

(c) administrative overheads that do not contribute to bringing inventories to their present location and condition. However, if an entity elects under paragraph 12.9 to exclude production overhead costs from the costs of conversion of inventories, all administrative overheads would be excluded from the cost of inventories; and 

(d) selling costs.

Notwithstanding paragraph 12.6, an entity may exclude from the costs of conversion a systematic allocation of production overhead costs incurred in the conversion process, such as a share of depreciation and maintenance costs of buildings and equipment used to produce the inventories. In this case, this election shall be applied consistently to all inventories produced by the entity.

Inventories of a service provider are measured at the costs of their production. These costs consist primarily of the labour and other costs of personnel directly engaged in providing the service, including supervisory personnel and attributable overheads. Labour and other costs relating to sales and general administrative personnel are not included but are recorded as expenses in the reporting period in which they are incurred. The cost of inventories of a service provider does not include profit margins or non-attributable overheads that are often factored into prices charged by service providers.

An entity may use techniques such as the standard cost method, the retail method or the most recent purchase price for measuring the cost of inventories if the result approximates cost. The standard cost method takes into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. Standard costs are regularly reviewed and, if necessary, revised in the light of current conditions. The retail method measures cost by reducing the sales value of the inventory by the appropriate gross margin percentage. Where feasible (eg for different items that ordinarily are not interchangeable) an entity may measure the cost of inventories by using specific identification of their individual costs.

An entity shall measure the cost of inventories, other than those measured using specific identification of their individual costs, by using the first-in, first-out (FIFO) or 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 formulae may be justified. The last-in, first-out (LIFO) method is not permitted by this Standard.

When inventories are sold or distributed, the entity shall record the carrying amount of those inventories as an expense in the reporting period in which the related sales revenue or distribution of inventory is recorded.

The amount of any write-down of inventories for impairment or loss of service potential and all losses of inventories shall be recorded as an expense in the reporting period in which the write-down or loss occurs.

If an item of inventory was donated without charge to the entity, and the entity elected under paragraph 12.5 to initially measure the item at its cost to the entity (nil), no expense is recorded on sale or distribution of the item.

An entity shall disclose the following: 

(a) accounting policy information about the measurement of inventories, including the cost formulae used; 

(b) the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity; 

(c) the amount of inventories recorded as an expense during the reporting period; 

(d) the impairment losses for inventories recorded in profit or loss and the related line item(s) in the statement(s) of profit or loss and other comprehensive income; and 

(e) the total carrying amount of inventories pledged as security for loans.

An entity shall disclose the basis or bases on which any loss of service potential of inventories held for distribution is assessed.

Where, in accordance with paragraph 12.5(a), an entity initially measures donated items of inventory at cost, it shall make the disclosures set out in paragraphs 15.30 and 15.31 in relation to donated items of inventory.