Regulating Inventory – an Examination of Aasb 102 “Inventories”
Regulating Inventory – An Examination of AASB 102 “Inventories”
Inventories are in essence what organisations hold with an intention to sell, however directly or indirectly. For most businesses, this is how their profits are made, and it is reasonable to assume that these items account for much of an organisation’s activities. Such a big influence on indicators of financial performance and position warrants an equally large need for regulation to ensure that users of the financial statements are given a clear picture of the state the organisation is in. The Australian Accounting Standards Board (AASB) is responsible for developing the standards that govern the way reporting entities disclose their accounting figures. Despite much international debate, the regulation of inventories has changed over the years, and problems that appear in even the current regulations make it likely that more changes are to come.
The standards governing inventories are contained in AASB 102 “Inventories.” Paragraph 6 of this standard defines inventories as assets held for sale in the ordinary course of business, in the process of production for such sales, or held in the form of materials or supplies to be consumed in the production process or rendering of services (2009). In order to give more conservative figures for the value of inventories held, they are to be valued at the “lower of cost and net realisable value” under paragraph 9, net realisable value being defined in paragraph 7 as the net amount expected to be realised from the sale of the inventory in the ordinary course of business.
The “cost” of inventories is defined as “all costs of purchase and conversion, and other costs incurred in bringing the inventories to their present location and condition,” in paragraph 10. Paragraphs 11-15 define the three elements of this cost. The “cost of purchase” includes in addition to the purchase price, any costs incurred in the acquisition of the finished goods less any discounts
Inventories are in essence what organisations hold with an intention to sell, however directly or indirectly. For most businesses, this is how their profits are made, and it is reasonable to assume that these items account for much of an organisation’s activities. Such a big influence on indicators of financial performance and position warrants an equally large need for regulation to ensure that users of the financial statements are given a clear picture of the state the organisation is in. The Australian Accounting Standards Board (AASB) is responsible for developing the standards that govern the way reporting entities disclose their accounting figures. Despite much international debate, the regulation of inventories has changed over the years, and problems that appear in even the current regulations make it likely that more changes are to come.
The standards governing inventories are contained in AASB 102 “Inventories.” Paragraph 6 of this standard defines inventories as assets held for sale in the ordinary course of business, in the process of production for such sales, or held in the form of materials or supplies to be consumed in the production process or rendering of services (2009). In order to give more conservative figures for the value of inventories held, they are to be valued at the “lower of cost and net realisable value” under paragraph 9, net realisable value being defined in paragraph 7 as the net amount expected to be realised from the sale of the inventory in the ordinary course of business.
The “cost” of inventories is defined as “all costs of purchase and conversion, and other costs incurred in bringing the inventories to their present location and condition,” in paragraph 10. Paragraphs 11-15 define the three elements of this cost. The “cost of purchase” includes in addition to the purchase price, any costs incurred in the acquisition of the finished goods less any discounts
References: - Australian Accounting Standards Board (2009, November 2). AASB 102 Inventories. Retrieved April 30, 2010, from http://www.aasb.com.au/admin/file/content105/c9/AASB102_07-04_COMPjun09_01-09.pdf - Australian Accounting Standards Board (2004, July) - Deegan, C. (2010). Australian Financial Accounting (6th ed.). North Ryde, NSW: McGraw Hill - Gibson, S