Accounting Guideline

GRAP 12

Inventory

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GRAP 12 Inventory

Contents
1. 2. 3. 4. 5. 6. INTRODUCTION ................................................................................................................ 4 SCOPE ............................................................................................................................... 5 BIG PICTURE ..................................................................................................................... 6 DEFINITION AND IDENTIFICATION................................................................................. 8 INITIAL RECOGNITION ................................................................................................... 11 INITIAL MEASUREMENT ................................................................................................ 13 6.1 6.2 6.3 6.4 6.5 7. Purchase costs .......................................................................................................... 13 Conversion costs ....................................................................................................... 19 Other costs ................................................................................................................ 22 Cost of inventories of a service provider .................................................................. 23 Cost of agricultural produce harvested from biological assets................................. 23

COST TECHNIQUES AND COST FORMULAS.............................................................. 24 7.1 7.2 General ...................................................................................................................... 24 Illustrative examples.................................................................................................. 25

8.

SUBSEQUENT MEASUREMENT ................................................................................... 28 8.1 8.2 8.3 8.4 General ...................................................................................................................... 28 Cost versus net realisable value ............................................................................... 28 Cost versus current replacement cost ...................................................................... 30 Reversal of inventory write-down.............................................................................. 32

9. 10. 11. 12. 13.

RECOGNITION AS AN EXPENSE .................................................................................. 33 DISCLOSURE ............................................................................................................... 34 RECOMMENDED CONTROLS.................................................................................... 36 INVENTORY SYSTEMS............................................................................................... 37 ENTITY-SPECIFIC GUIDANCE ................................................................................... 38 Municipalities ............................................................................................................. 38 SUMMARY OF KEY PRINCIPLES .............................................................................. 40 Scope ........................................................................................................................ 41
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13.1 14. 14.1

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14.2 14.3

Definition and identification ....................................................................................... 41 Recognition and measurement ................................................................................. 41

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1.

INTRODUCTION
This document provides guidance on the accounting treatment for inventories. It also contains guidance on the cost formulas used to assign costs to inventory. The content should be read in conjunction with GRAP 12 (issued February 2010) and includes any changes made by the Board in terms of the Improvements to Standards of GRAP. For purposes of this guide, entities refer to the following bodies to which the standards of GRAP relate to, unless specifically stated otherwise: Public entities Constitutional institutions Municipalities and all other entities under their control Parliament and the provincial legislatures

Explanation of images used in the manual:

Definition

Take note

Management process and decision making

Example

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2.

SCOPE
GRAP 12 is applicable to all entities preparing their financial statements on the accrual basis of accounting. The standard does not apply to: Work-in-progress within the scope of GRAP 11 on Construction Contracts; Financial instruments, within the scope of GRAP 104 on Financial Instruments; and Biological assets related to agriculture activity and agricultural produce at the point of harvest, which falls within the scope of GRAP 27 on Agriculture (refer to section 6.5 dealing with agricultural produce). The measurement principles of GRAP 12 should not be applied to: Products relating to mining, forestry and agricultural industry which are measured at net realisable value in accordance with well-established practice of the relevant industry. Changes in the net realisable value of such inventory is recognised in surplus or deficit in the period of change; and Inventories of commodity broker-traders which are measured at fair value less cost to sell. Any changes in the fair value less cost to sell should be recognised in surplus or deficit in the period of the change.
Formatted: Indent: Left: 0.75 cm, No bullets or numbering

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3.

BIG PICTURE

Inventories Identification Recognition

Measurement Initial Measurement Cost Fair Value Subsequent Recognise As Measurement Expense Lower of: Cost or Net Realisable Value Lower of: Cost or Current Replacement Cost Disclosure

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Figure 1

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4.

DEFINITION AND IDENTIFICATION

Inventories are assets: Inventories include: goods purchased and held for resale; finished goods produced, or work-in-progress, being produced by the entity; materials and supplies awaiting use in the production process; goods purchased or produced by an entity, which are for distribution for no charge or for a nominal charge; and inventories relating to provision of services rather than goods purchased and held for resale or goods manufactured for sale. in the form of materials or supplies to be consumed in the production process; in the form of materials or supplies to be consumed or distributed in the rendering of services; held for sale or distribution in the ordinary course of operations; or in the process of production for sale or distribution.

Examples of inventory in the public sector: ammunition held by the SAPS or the Defence Force; consumable stores; medical supplies held by the Department of Health; licensing stationery held by the Department of Transport; fuel, oil and gas; maintenance materials; spare parts for plant and equipment that qualifies as inventory; water held by a municipality; work-in-progress such as educational and course materials; land or property held for sale.

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Inventory vs. property, plant and equipment In order for management to identify whether an item constitutes property, plant and equipment or an inventory item, the following needs to be considered: Criteria to recognise an asset in accordance with GRAP 12 and GRAP 17 on Property, Plant and Equipment; Inventory Property, plant and equipment Non-current asset Current asset Expected to be used during more than Used, consumed, distributed or sold one reporting period within an entitys operating cycle Assets held for : Assets: Use in the production or supply of Held for sale or distribution in the goods or services; ordinary course of operations ; Rental to others; or In the process of production for Administrative purposes. sale or distribution; or In the form of materials or supplies to be: o consumed in the production process; or o consumed or distributed in the rendering of services. Use of the specific item, e.g. spare parts or stand-by and maintenance equipment are usually recognised as inventory and expensed once used, but when it is used to replace a major part of property, plant and equipment (therefore a major spare part or servicing equipment) or it is expected to be used for more than one reporting period, it will be treated as property, plant and equipment and depreciated; and Specific operations of the entity, e.g. the fire brigade that maintains a large volume of various types of fire extinguishers and treats them as inventory, while another entity may have a fire extinguisher installed in their administration building and capitalise such an item as property, plant and equipment. So too will certain items that may normally be considered items of property, plant and equipment be inventory in the hands of the dealer therein, e.g. motor vehicle dealers, IT dealers and property developers.

Example 1: Identification of inventory Entity Z keeps spare parts that can be used to replace a part of machinery. These spare parts can also be used in the entitys daily operations and can be sold as well. The lifespan of the spare parts are at least two years. This type of spare part should be recognised as inventory. It is recognised as property, plant and equipment, once it is used to replace a part of Machinery A. The remaining spare parts should be recognised as inventory even though it may take two years to realise.

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In accordance with GRAP 1 on Presentation of Financial Statements, current assets are expected to be realised in the entitys normal operating cycle. The operating cycle of an entity is the time taken to convert inputs or resources into outputs. Current assets include assets (such as taxes receivable, user charges receivable, fines and regulatory fees receivable, inventories and accrued investment revenue) that are either realised, consumed or sold, as part of the normal operating cycle even when they are not expected to be realised within twelve months of the reporting date.

Stationery and similar consumables To assist management to determine whether stationery and similar consumables should be capitalised, i.e. treated as inventory or be expensed as incurred, the following needs to be considered: Stationery and similar consumables will probably meet the definition of inventory; however, the standard does not need to be applied when the effect of applying it is immaterial. Most consumables are not material, but if the balance at year end is material, then the recognition thereof will be required; The period of use should be taken into consideration when immediately expensing items purchased. Where items are kept for lengthy periods of time, it might be more appropriate to recognise them as inventory even though they may not be material at the date of purchase; The probability that economic benefits or service potential will flow to the entity beyond the current reporting period. Whatever the accounting treatment is for consumables, management is required to maintain proper control over these assets.

Example 2: Consumables that may meet the definition of inventory The following are examples of items of stationery and similar consumables that may meet the definition of inventory, if material: Printing material, e.g. paper, printer cartridges etc.; Other stationery or consumable stores purchased in bulk, e.g. files, flash-disks, pens, pencils, rulers, scissors, correction fluid, batteries etc.; Office refreshments purchased in bulk, e.g. coffee, tea, long-life milk etc. If the items mentioned above are material, or are expected to be kept for lengthy periods of time, it may be capitalised as inventory in accordance with GRAP 12.

Land classified as inventory vs. property, plant and property Inventory Property, plant and equipment Intention to develop land Own land which will be and to sell or transfer it to developed for future use
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equipment vs. investment Investment property Intention to develop land for economic or housing
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a third party (parties)

in service delivery

development that will be held to generate future rental income

Where the entity controls the right to create and issue assets such as revenue stamps, these items are recognised as inventory and measured at their printing costs. Strategic stockpiles of reserves maintained by the entity (e.g. fuel, food, medicines etc.), for use in emergency situations, are recognised as inventories and falls within scope of GRAP 12.

5.

INITIAL RECOGNITION
Inventory is recognised as an asset when: it is controlled by the entity; as a result of a past event (acquisition or production thereof); from which it is probable that future economic benefits or service potential associated with the item will flow to the entity; and the cost (or fair value) of the inventory can be measured reliably.

An entity should recognise inventory on the day when the risk and rewards of ownership of the inventory have been transferred to the entity. This will normally be the date on which the inventory is delivered. However there are exceptions, for example when inventory is shipped free on board (FOB), in which case the risk and rewards are transferred to the buyer when the goods are loaded onto the ship, resulting in the buyer recognising inventory on the FOB date. Example 3: Initial recognition of inventory Entity Z ordered 1 million units of special paper for R500, 000 on 31 March 2010. The invoice was received on 2 April 2010. The paper was delivered on 5 April 2010. Based on above, the accounting treatment is: On 31 March 2010, no entry is made. On date of delivery (5 April 2010) the following journal entry would be made: 5 April 2010 Debit Credit

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R Inventory (paper) Creditor 500,000

R 500,000

On 5 April 2010, the paper was delivered to the entitys premises. Entity Z has to recognise the inventory and relevant liability. Assume the following additional information: If Entity Z made a payment on 2 April 2010, when the invoice was received, but inventory has yet to be received, the entity should recognise a prepayment on 2 April 2010. On date of payment (2 April 2010) the following journal entry would be made: 2 April 2010 Prepayment Bank Debit R 500,000 500,000 Credit R

On date of delivery (5 April 2010) the following journal entry would be made: 5 April 2010 Inventory Prepayment Debit R 500,000 500,000 Credit R

Only once the inventory is delivered, should it be recognised as an asset (inventory), as that is when risks and rewards of ownership have been transferred. When recognising an asset in the public sector, the focus would most likely be on service potential rather than future economic benefits. These two concepts are discussed below. Future economic benefits is usually in the form of future receipts of cash or cash equivalents, however it may also have the capacity to lower cash outflows, such as when an alternative process lowers the cost of providing a service. Example 4: Economic benefits An entity provides electricity to the public at Rx a unit. Therefore future economic benefits exist, as it is probable that the entity will receive payment for the electricity consumed by the public.

Service potential is the capacity of an asset, individually or in a group with other assets, to contribute directly or indirectly to achieving the objectives of the entity. These objectives may include delivering a service to the public without receiving any economic return. Therefore assets that are used to deliver goods and services in accordance with an entitys mandate

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but do not directly generate net cash inflows are often described as embodying service potential. Example 5: Service potential An entity distributes vaccines for foot and mouth disease for free to farmers. In this case there is no direct economic benefit to the entity distributing the vaccines, but there is a service potential value (of containing and eradicating the disease) that can be associated with the vaccines. The vaccines provide benefit to the entity that controls the vaccines and the distribution thereof supports service delivery. The vaccines also have a resale value (even though the entitys mandate is to distribute them for free). The vaccines could be exchanged for something else that is useful to the entity and it may save the entity money in the future (costs associated with its distribution). The vaccines therefore have service potential.

6.

INITIAL MEASUREMENT
Inventories are initially recognised at cost which includes all costs of purchases, cost of conversion and any other costs incurred to bringing the inventories to its present location and condition. Where inventories are acquired at no cost of for nominal consideration, it should be recognised at fair value at the date of acquisition. Fair value is an approximation of cost where there was no actual cost incurred in acquiring the inventories. For example, where inventory was donated to the entity, the inventory should be measured at its fair value at date when it was received. The value can be determined by obtaining the value of similar inventory in the same condition.

6.1 Purchase costs

Purchase costs include the purchase price of finished goods or raw materials, import duties and other taxes that will not be refunded from taxing authorities, transport costs of getting the inventory from the supplier to the entitys premises, handling costs and any other costs directly involved in the acquisition of finished goods, materials and supplies. VAT, if applicable, is generally recoverable and is therefore not included in the cost of inventory. If only a portion of the VAT is recoverable, then the portion which is not recoverable should be included in the cost of inventory. Example 6: Purchase cost Entity B bought inventory for R228, 000 (including VAT) and paid cash. The inventory was transported to Entity Bs premises by truck and the total transport cost was R1, 140 (including VAT). Entity B also insured the inventory while in transit and the insurance amounted to R2, 280 (including VAT). The total cost of the inventory will be calculated as follows:

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R Purchase price Plus transport cost Plus insurance cost Sub-total (payable to suppliers) Less VAT @14% (R228,000 x 14/114) + (1,140 + 2,280 c 14/114) Total cost of inventory 228,000 1,140 2,280 231,420 (28,420) 203,000

Inventory will be recorded as follows on transaction date: Debit R VAT Input Inventory Bank 28,420 203,000 231,420 Credit R

Rebates, trade discounts and similar items and finance cost, if deferred settlement terms are allowed by the supplier, should be deducted from the purchase costs. These are discussed in more detail below. Rebates Rebates to be received from the supplier, which represent a refund of part of the purchase price, should be estimated at the date of purchase of the inventories and should be deducted from the cost of the inventories. If however, the rebates represent a refund of selling expenses incurred by the buyer of the inventories, the rebates should not affect the cost of the inventories.

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Example 7: Rebates Entity A purchases water at R9, 000 per mega litre. The supplier has agreed to provide a 2.5% rebate if Entity A buys 1,000 mega litres of water in the financial period. The rebate is payable by the supplier at the end of the financial period. Entity A should, based on past experience, determine the probability that they will purchase at least a minimum of a 1,000 mega litres in the financial period. If it is likely that Entity A will purchase the minimum quantity of water, then each time a purchase is made, a mega litre at a cost of R8,775 (R9,000 x 97.5%) should be recognised with the resulting rebate of R225 being recognised as a receivable until date of receipt. Assume that Entity A purchased 120 mega litres in July. Journal entries: The following journal entry would be made on transaction date: Debit R Inventory (Water) (120 x R8,775) Receivable (rebate) Bank (120 x R9,000) Purchases in July and recognition of rebate receivable on purchases Assume the following information: On the other hand, if based on past experience it does not seem probable that the entity will buy the minimum quantity of water to receive the rebate, and then it should recognise a mega litre at a cost of R9, 000. Should it then at a later stage become probable that Entity A will buy the minimum quantity of water, then the portion of the rebate for water already sold should be recognised as an expense while the remainder should be deducted from inventory. If we assume that in the beginning of the financial period, the entity did not anticipate buying the minimum of a 1,000 mega litres of water. During the first 6 months the entity purchased 550 mega litres of which it sold 500 mega litres. However, after the first 6 months, the entity decided that it is now probable that they will purchase at least a minimum of a 1,000 mega litres. In month 7 the entity purchased another 110 mega litres. Journal entries: The journal entries will be as follows: Debit R Inventory (Water) Bank (550 x R9,000) Purchase of inventory in first 6 months 4,950,000 4,950,000 Credit R 1,053,000 27,000 1,080,000 Credit R

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Debit R Cost of sales (500 x R9,000) Inventory (Water) Recognise inventory as expense when it is sold 4,500,000

Credit R 4,500,000

Debit R Receivable (rebate) (550 x R9, 000 x 2.5%) Cost of sales (500 x R9, 000 x 2.5%) Inventory (Water) (50 x R9, 000 x 2.5%) 123,750

Credit R 112,500 11,250

Adjust the expense and inventory amounts and recognise the rebate receivable for the first 6 months, as the entity now estimates that they will receive the rebate

Debit R Inventory (110 x R8,775) Receivable (rebate) Bank (110 x R9,000) Purchases in month 7 and recognition of rebate receivable on purchases Settlement discount 965,250 24,750

Credit R

990,000

Any settlement discount to be received for prompt settlement of the purchase price due should be estimated at the date of purchase of the inventories and should be deducted from the cost of the inventories.

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Example 8: Settlement discount An entity buys inventory with a cost of R100, 000 from supplier B, who offers a 10% discount if the amount due is settled within 15 days. At initial recognition, the entity needs to determine if they will make use of the settlement discount. If so, the journal entry would be as follows on transaction date: Debit R Inventory (R100, 000 x 90%) Supplier B Assume the following additional information: If 15 days have passed and the entity did not make use of the settlement discount, the entity needs to reverse the rebate. The portion of the inventory already sold should be recognised as an expense, while the remainder should be reversed against inventory. Assume that the entity already sold 15% of the inventory on hand. The journal entries for the selling of inventory and the reversal of the rebate would be as follows: Debit R Cost of sales (100,000 x 15%) Inventory Recognise inventory as expense when it is sold 15,000 15,000 Credit R 90,000 90,000 Credit R

Comment [MS1]: FOR ASB - is the settlement discount forfeited a finance cost (like Gripping GA example) Is the discount calculated on the right inventory amount R100 vs. R90?

Debit R Inventory [(R100,000 R15,000) x 10%] Cost of sales (R15, 000 x 10%) Supplier B (R100, 000 x 10%) 8,500 1,500

Credit R

10,000

Adjust the expense and inventory amounts and reverse the rebate, as the entity did not make use of the settlement discount Deferred settlement terms If an entity purchases inventories on deferred settlement terms or over an extended period granted by the supplier, the effect of the time value of money should be taken into account, if material. This is done by discounting the future cash flows back to a present value. This present value is then recognised as the cost of inventory. Any difference between this present value and the amount actually paid is accounted for as interest over the period of the financing.
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It should be noted that this treatment is to be followed even if the selling price has not been inflated to compensate the seller for the effect of the extended payment period. Example 9: Deferred settlement terms An entity purchases inventory from a supplier for R110, 000,000 and the payment is due in 3 months (which is considered to be beyond normal credit terms). The supplier does not charge the entity any interest. However, this transaction has a financing element due to the deferred settlement terms and therefore the purchase amount needs to be discounted to its present value. Assuming a current market interest rate of 10% in similar circumstances, the present value is calculated as follows: i = 10% p.a. pmt = 0 n=3 FV = R110,000,000 PV = R107,295,205 (to be calculated by using MS Excel or a financial calculator) The interest to be recognised over 3 months amounts to R2, 704,795 (R110, 000,000 - R107, 295,205). Journal entries: The journal entry at initial recognition will be: Debit R Inventory Payable Interest to be recognised over 3 months: Debit R Interest paid Payable On date of payment: Debit R Payable Bank 110,000,000 110,000,000 Credit R 2,704,795 2,704,795 Credit R 107,295,205 107,295,205 Credit R

When inventory is imported and payable in a foreign currency, the cost of inventory is determined using the exchange rate at the date of the transaction. Refer to the accounting guideline on GRAP 4 for guidance on what exchange rate should be used and what is considered the transaction date for a foreign currency transaction.

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6.2 Conversion costs

Conversion costs are costs to convert items from raw materials into finished goods which are mainly found in a manufacturing environment. This would include costs directly related to the production such as direct labour, variable production overheads and fixed production overheads based on normal capacity. Variable productions overhead are indirect costs of production that vary with the volume of production, e.g. indirect materials, water consumption, and electricity usage. These costs are allocated to each unit of product based on actual usage. Fixed production overheads are those indirect costs that will be incurred irrespective of the volume of production, such as insurance of the factory building and depreciation of plant and equipment. Fixed production overheads are allocated based on the normal capacity of production. Normal capacity as described by the standard is the normal production expected to be achieved on average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. If actual level of production approximates normal capacity, the actual capacity may be used. Where there is abnormally high production, the fixed overhead allocated to each unit is decreased, so that inventories are not measured above cost. If there are unallocated overheads, such expenses are recognised in the period in which they are incurred in the surplus or deficit. Example 10: Allocation of fixed production overheads Below normal capacity: Assume that production overheads amount to R500, 000 and normal capacity equals 50,000 units. The actual production during the period amounted only to 45,000 units. The allocation of the overheads should be based on the normal capacity of 50,000 units, resulting in a cost of R10 per unit (R500, 000 / 50,000). As the actual production only amounts to 45,000, the cost allocated to inventory is only R450, 000 (45,000 x R10). The remaining R50, 000 (under-recovery) should be recognised in surplus or deficit as part of cost of sales. The following illustrates the disclosure that will be made in the annual financial statements of the entity: Extract from Statement of financial performance Revenue Cost of inventory Gross profit 3 Note 20x1 R XX (500,000) XX 20x0 R XX (XX) XX

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Extract from Notes to the financial statements 3. Cost of inventory Cost sales of finished goods Fixed production overhead costs Opening inventory Closing inventory Under-recovery of fixed production overhead costs Total cost of inventory 3

20x1 R 450,000 450,000 XX (XX) 50,000 500,000

20x0 R XX XX XX (XX) XX 500,000

Above normal capacity: If the actual production during the period was 60,000 units (assume this as abnormally high), the fixed cost per unit must be reduced to R8.33 (R500, 000 / 60,000) to ensure that only R500, 000 is allocated to the cost of inventory. The following illustrates the disclosure that will be made in the annual financial statements of the entity: Extract from Statement of financial performance Revenue Cost of inventory Gross profit 3 Note 20x1 R XX (500,000) XX 20x0 R XX (XX) XX

Extract from Notes to the financial statements 3. Cost of inventory Cost sales of finished goods Fixed production overhead costs Opening inventory Closing inventory Total cost of inventory 3

20x1 R 500,000 500,000 XX (XX) 500,000

20x0 R XX XX XX (XX) 500,000

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Conversion costs

Direct cost

Indirect costs

Direct labour

Variable overhead

Fixed overhead

Allocated based on actual usage

Allocated based on actual usage

Allocated based on normal capacity

Figure 2 summary for allocation of conversion costs A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or when there is a main product and a by-product. When the costs of conversion of each product are not separately identifiable, they are allocated between the products on a rational and consistent basis. The allocation may be based, for example, on the relative sales value of each product either at the stage in the production process when the products become separately identifiable, or at the completion of production. Most by-products, by their nature, are immaterial. When this is the case, they are often measured at net realisable value or current replacement cost and this value is deducted from the cost of the main product. As a result, the carrying amount of the main product is not materially different from its cost. Net realisable 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. Current replacement cost is the cost the entity would incur to acquire the asset on the reporting date. These concepts are discussed in detail under subsequent measurement.

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Example 11: Joint products X Resources extracts chemical Y and chemical Z from liquid concentrate residue purchased. The depreciation on the machine used to extract chemical Y and chemical Z is R10, 000 per day, while the machine operator is paid R1, 000 per day. The machine can process up to 100 litres of concentrate in a day. About 60% of what is extracted is chemical Y, 35% chemical Z and the rest is scrap. The selling prices of chemical Y and Z amounts to R500 and R1, 250 per litre respectively. It is the entitys policy to absorb the normal loss in the joint product based on their sales value. Information and calculations based on above: Sales value of chemical Y Sales value of chemical Z Total cost of extracting 1 litre of residue Cost to be allocated to chemical Y Co t to be allocated to chemical Z R30,000 (100 x 60% x R500) R43,750 (100 x 35% x R1,250) R110 (R10,000 / 100 + R1,000 / 100) R44.75 per (R110 x (R30,000 / (R30,000+ R43,750))) R65.25 per (R110 x (R43,750 / (R30,000+ R43,750)))

6.3 Other costs

Other costs may only be included in the cost of inventories if they are incurred in bringing the inventories to their present location and condition. Such cost may include packaging costs incurred to prepare inventory for sale and borrowing costs that may be capitalised in terms of GRAP 5 on Borrowing Costs. Refer to the accounting guideline on GRAP 5 for more detail. Certain expenditures are excluded from the cost of inventories and should be recognised as an expense in the period that it is incurred, such as: abnormal amounts of wasted materials or labour; storage costs, unless those cost are necessary in the production process before a further production stage; administrative expenses that were not required to bring inventories to their present location and condition; and selling expenses.

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6.4 Cost of inventories of a service provider

Inventories of a service provider include the costs of service for which the related revenue has not been recognised. The costs are primarily labour costs, cost of personnel directly involved in providing the service as well as the attributable overheads. Costs of labour that are not directly engaged in providing the service such as general administrative personnel and sales costs should be excluded and recognised as an expense when incurred. Profit margins and other overheads are excluded from the cost of inventory. Example 12: Cost of inventory of a service provider Entity A provides accounting services at a fixed rate per hour. The revenue for Entity A will be the service fee received or receivable and the inventory at year-end will be the cost of services rendered for which the related service has not yet been recognised. The entitys employees complete time sheets recording their time spent on specific projects. At 31 March 2011 there was unbilled work-in-progress of 485 hours for various clients. These hours should be valued as inventory at the cost of compensation to the employees. Assuming the cost is R100 per hour, the inventory at year-end is R485,000 (485 x R100). The journal entry at reporting date will be as follows: Debit R Inventory (work-in-progress) (485 hours x R100) Employee cost (liability) 485,000 485,000 Credit R

6.5 Cost of agricultural produce harvested from biological assets

In terms of GRAP 27 on Agriculture, agricultural produce that have been harvested from biological assets are measured on initial recognition at fair value less selling cost at the point of harvest. This is the cost of the inventories at that date for application of GRAP 12. Agricultural produce is accounted for in accordance with GRAP 27 Agriculture, only up to the point of harvest, thereafter it is classified as inventory and accounted for in accordance with GRAP 12. The deemed cost of agricultural produce transferred to inventory is measured at fair value less selling cost at the point of harvest. For subsequent measurement, the inventory will be carried at the lower of its deemed cost and net realisable value or current replacement cost.

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7.

COST TECHNIQUES AND COST FORMULAS

7.1 General
Now that we have discussed which types of costs can (and cannot) be included as part of the total cost of inventory, it is important to know which type of cost formulas should be used in order to measure inventory correctly in the statement of financial position. The following types of costs formulas should be used in terms of GRAP 12: Cost formula Specific identification Circumstances in which the formula will be used Items which are not ordinarily interchangeable and goods or services produced and segregated for specific projects. All other items apart from those that are required to use specific identification method. All other items apart from those that are required to use specific identification method.

First-in, first out (FIFO)

Weighted average cost formula

Cost of inventories that are similar in nature and use to the entity should be determined by using the same cost formula. Cost formulas should not be different simply as a result of different geographical locations of inventories. Selecting a cost formula(s) is an accounting policy choice. If an entity decides to change the cost formula used to measure its inventory (subject to compliance with the requirements of GRAP 3), it will result in a change in accounting policy and should be applied retrospectively in accordance with GRAP 3.

Specific identification of costs means that specific costs are attributed to identified items of inventory

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Specific identification of costs would not be suitable when there are large numbers of items of inventory that are ordinarily interchangeable.

Under the FIFO basis, inventories are valued with the assumption that items that were purchased or produced first, will be sold first. Under the weighted average cost basis, the cost of an item is determined from weighted average of the cost of similar items at the beginning of a period and the costs of similar items purchased or produced during the period. It can be calculated on a periodic basis, or per consignment, depending on the situation of the entity.

7.2 Illustrative examples

Example A applying the first-in-first-out or weighted average cost formulas Applying the first-in-first-out formula On 1 April 2009 Entity A buys 1,000 units of product X at R2.00 per unit. On 1 December 2009 Entity A buys another 500 units of product X at R2.50 per unit. At 31 March 2009, 600 units were on hand, thus 900 units were sold during the year. Calculations: The 900 units sold were calculated as follows: Units sold = Units on hand at beginning of reporting period + Purchases Units on hand at end of reporting period Units sold = 0 + 1,500 600 I.e. 900 units

Calculating cost of sales (units sold) at reporting date Cost of sales = Opening balance of inventory on hand + Purchases Closing balance of inventory on hand Calculating closing balance of inventory on hand at reporting date Closing balance of inventory on hand = Opening balance of inventory on hand + Purchases Cost of sales

Calculations:

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The value of inventory on hand at year end will be calculated as follows: R1,250 (500 x R2.50) + R200 (100 x R2.00) = R1,450 How do you determine how many units to use at which purchase price: There are 600 units on hand, FIFO assumes that items on hand were purchased last, therefore the last purchase price of R2.50 will be used for the first 500 units (also the maximum that can be used). There are still 100 units short, therefore the price should be taken from the second last purchase made, which was R2 per unit. Applying the weighted average formula On 1 April 2009 Entity A buys 1,000 units of product X at R2.00 per unit. On 1 December 2009 Entity A buys another 500 units of product X at R2.50 per unit. At 31 March 2009, 600 units were on hand, thus 900 units were sold during the year. Weighted average cost per unit is calculated by dividing inventory purchased by the sum of opening inventory plus purchases minus inventory sold.

Calculations: The weighted average cost per unit is: [R2,000 (1,000 x R2.00) + R1,250 (500 x R2.50)] / 1,500 = R2.17 The value of inventory on hand at year end will therefore be: R2.17 x 600 = R1,300 For this example it was assumed that the weighted average cost per unit is calculated periodically, i.e. on a yearly basis (note that the weighted average cost can be calculated after each purchase or periodically, e.g. weekly, monthly, yearly, etc., consequently, depending on how it is done, it could result in different costs per unit). To illustrate the concept above, assume that Entity A calculates the weighted average cost per unit after every purchase. The following inventory transactions took place during the month of October 2009: Date 01 October 02 October 05 October 15 October 20 October Movement Opening balance Sales Purchases Sales Purchases Units 200 (120) 300 (200) 150 Cost / sale price per unit (R) 20 40 24 48 30

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GRAP 12 Inventory

25 October 31 October

Sales Closing balance

(150) 180

50 ?

The calculation of the weighted average cost per unit will be done as follows: Date 01 October 02 October Movement Opening balance Sales Units 200 (120) 80 05 October Purchases 300 380 15 October Sales (200) 180 20 October Purchases 150 330 25 October 31 October Calculations: The value of inventory on hand at month end will therefore be: R1, 250 (500 x R2.50) + R200 (100 x R2.00) = R1, 450. R26.27 x 180 = R4,729 Assume the following additional information: If we take the same example, but calculate the weighted average on a yearly basis (as in our first example), the outcome will be as follows: Units Opening balance Purchases Purchases Total Calculations: The weighted average cost per unit is: 15,700 / 650 = R24.15 The value of inventory on hand at year end will therefore be: R24.15 x 180 = R4,347 200 300 150 650 Cost price per unit (R) 20 24 30 Total cost price (R) 4,000 7,200 4,500 15,700 Sales Closing balance (150) 180 Cost per unit (R) 20 20 20 24 23.16 [(80x20) + (300x24)] / 380 23.16 23.16 30 26.27 [(180x23.16) + (150x30)] / 330 26.27 26.27

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GRAP 12 Inventory

As can be seen from the previous calculations, the weighted average cost per unit and ultimately the value of inventory on hand will differ depending on the basis used to calculate the cost per unit.

8.

SUBSEQUENT MEASUREMENT
8.1 General
Under subsequent measurement, the requirement of GRAP 12 is that inventory should be measured at the lower of cost and net realisable value, with the following exception: Inventory should be measured at the lower of cost and current replacement cost where they are held for: o distribution at no charge or for a nominal charge; or o consumption in the production process of goods to be distributed at no cost or for a nominal charge.

8.2 Cost versus net realisable value

Cost incurred on inventories may become irrecoverable if those inventories are damaged, obsolete, selling prices declined due to market conditions, or the estimated costs incurred to complete has increased. To write down inventories to net realisable value is consistent with the view that assets should not be reflected in excess of the future economic benefits or service potential expected to be realised from their sale, exchange, distribution or use. Inventories that are held for distribution at a market price are measured at the lower of cost and net realisable value upon subsequent measurement. Net realisable 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.

Example 13: Inventory write-down to net realisable value Entity Zs reporting date is 30 June 2009. During 2008, Entity Z, operating in South Africa, imports diesel from Iraq at R5 per litre which is sold at R7.5 per litre. During 2009, scientists and geologists discovered oil fields in Malawi. As from 2009 diesel can be imported at R2 per litre from Malawi. This results in an announcement from the South African government that diesel can only be sold at a maximum of R4.5 per litre. At the reporting date, Entity Z still holds 5,000 litres of diesel imported from Iraq during 2008.
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GRAP 12 Inventory

The net realisable value of diesel on hand at 30 June 2009 is R4.5 per litre. The inventory carrying amount before any write-down at reporting date is R25, 000 (5,000 x R5). Based on above: Inventory must be written down to its net realisable value of R22, 500 (5,000 x R4.5). The difference of R2, 500 is recognised as an expense in surplus or deficit for the period. Disclosure: The following illustrates the disclosure that will be made in the annual financial statements of Entity Z. Extract from Statement of financial position Current assets Inventory 3 22,500 XX Note 2009 R 2008 R

Extract from Notes to the financial statements 3. Inventory Inventory consists of the following: Finished goods

2009 R

2008 R

22,500

XX

At the end of the reporting period, finished goods were written down to their net realisable value due to a decrease in the import cost of fuel. The write-down amounted to R2, 500 which is recognised as part of the cost of inventory in the statement of financial performance. Inventories can be written down to net realisable value on an item by item basis, or where appropriate similar items may be grouped. The write-down should not be done based on a classification of inventory (such as finished goods) or a particular operation or geographical segment (such as all the inventories in a specific operation). In most cases, service providers would accumulate cost for each service that has a separate selling price charged. It would then be appropriate to treat each service as a separate item. Estimates of net realisable value are based on the most reliable evidence available at the time when estimates are made.

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GRAP 12 Inventory

To estimate net realisable value, the following will be considered: Fluctuations of price; and Cost directly related to adjusting events (as defined in terms of GRAP 14 on Events after Reporting Period).

Management will also consider the purpose for which the inventory is held. In a situation where an entity holds inventory for the purpose of satisfying a firm sale or in terms of a service contract based on a fixed contract price, the net realisable value of those inventories required to satisfy the contract would be the contract selling price. On the other hand, the net realisable value of the excess quantity of inventory held will be based on the general selling price and not the contract price. Example 14: Net realisable value of inventory held for a firm sale Entity A purchased 600 units of inventory with a cost of R200 per unit. A contract was entered into 2 days later whereby 500 units will be sold at R180 per unit in terms of contract entered into with entity B. These inventories are normally sold at R250 per unit. The 500 units to which the contract relate, have a net realisable value of R180 per unit and should be written down from R200 to R180 per unit. The remaining 100 units should remain at cost, since the net realisable value is higher than cost. Raw materials and supplies held to be used in the production of inventories will not be written down if the finished goods are expected to be sold or exchanged at, or above cost. However, when a decrease in the price of raw materials shows that the cost of finished goods will exceed its net realisable value, raw materials should be written down to net realisable value. In a situation like this, the replacement cost of the materials may be the best estimate of net realisable value.

8.3 Cost versus current replacement cost

In certain situations, an entity may hold inventories with future economic benefits or service potential that are not directly related to their ability to generate net cash inflows, i.e. inventories are distributed at no charge or for nominal value. Therefore, where market rates are not applicable for distribution of inventories, they are measured at the lower of cost and current replacement cost upon subsequent measurement. Current replacement cost is the cost the entity would incur to acquire the asset on the reporting date. Therefore, it is the value that the entity would need to pay to replace the inventory should the need arise.

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GRAP 12 Inventory

Example 15: Current replacement cost of inventory that will be discharged at no cost Entity B purchased 200 units of inventory X with a cost of R65 per unit, to be distributed to the various departments at no cost. At year end there were 20 units on hand and the cost to acquire inventory X is now R60 per unit. Based on above: As inventory is distributed it will be recognised as an expense. The remaining units on hand should be written down to their replacement cost of R60 per unit. Journal entries: The journal entries will be as follows: At transaction date Inventory (200 x R65) Bank Purchase of inventory X At date of distribution Inventory distributed/used (180 x R65) Inventory Recognise inventory X as expense when it is distributed/used At year end Write-down of inventory to current replacement cost [20 x R5 (R65 - R60)] Inventory Debit R 100 100 Credit R Debit R 11,700 11,700 Credit R Debit R 13,000 13,000 Credit R

Inventory X on hand written down to its current replacement cost of R60 per unit Disclosure: The following illustrates the disclosure that will be made in the annual financial statements of Entity B. Extract from Statement of financial position Current assets Inventory 3 1,200 XX Note 2009 R 2008 R

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GRAP 12 Inventory

Extract from Notes to the financial statements 3. Inventory Inventory consists of the following: Consumables held for distribution

2009 R

2008 R

1,200

XX

At the end of the reporting period, consumables were written down to their current replacement cost. The write-down amounted to R100, which is recognised as part of the cost of inventory in the statement of financial performance.

8.4 Reversal of inventory write-down

At each subsequent period, a review is made of the net realisable value, if the inventory is still on hand in those subsequent periods. If the conditions that previously resulted in a write down of inventory below cost is no longer applicable, or there are new circumstances that results in an increase of the net realisable value, the write-down will be reversed to reflect the new carrying amount at the lower of cost and net realisable value. It is important to bear in mind that the reversal of the write-down is limited to the original amount of the write-down. Example 16: Reversal of inventory write-down Assume the same information as in Example 13 above. During the 2010 financial period, the Malawian government announces new legislation to limit the exporting of diesel to South Africa. This results in an increase of diesel cost to R3.5 per litre, after which the South African government makes a new amendment allowing diesel to be sold at a maximum of R5.5 per litre. At 30 June 2010 Entity Z still holds 2,000 litres of diesel from the previous period. Based on above: The net realisable value of diesel has now increased to R5.5 per litre. As a result the write-down in 2009 is reversed. The difference between the current net realisable value and the carrying amount is R1 per litre; however, as the write-down in 2009 was R0.5 per litre, the reversal will be limited to the write-down in 2009. Calculations: The inventory carrying amount before any reversal of write-down at reporting date is R9, 000 (2,000 x R4.5). The reversal for 2010 to adjust the carrying amount of inventory is R1, 000 (2,000 x R0.5) which is recognised as a reduction in the amount recognised as an expense in surplus or deficit for the period. The new carrying amount will therefore be R10, 000 (R9, 000 + R1, 000).

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GRAP 12 Inventory

Disclosure: The following illustrates the disclosure that will be made in the annual financial statements of Entity Z. Extract from Statement of financial position Current assets Inventory 3 10,000 22,500 Note 2010 R 2009 R

Extract from Notes to the financial statements 3. Inventory Inventory consists of the following: Finished goods

2010 R

2009 R

10,000

22,500

At the end of the reporting period, a write-down recognised in the previous period was reversed due to an increase in the import cost of fuel. The reversal of the write-down amounted to R1, 000 which is recognised as a reduction in the cost of inventory in the statement of financial performance.

9.

RECOGNITION AS AN EXPENSE
Once inventories are sold, exchanged or distributed, the carrying amount of those inventories should be recognised as an expense in the same period in which the corresponding revenue was recognised. Where there is no related revenue, the expense is recognised when the goods are distributed, or related services are rendered. Any inventory write-down to net realisable value or current replacement cost and any losses of inventory should be recognised as an expense in the period which the write-down or loss occurs. In periods where the inventory write-downs are reversed, it will be recognised as a reduction in the amount of inventories recognised as an expense in that period. In certain situations inventories may be included in other asset accounts, for example inventory used as a component of property, plant and equipment. Such inventory is recognised as an expense over the useful life of that asset.

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GRAP 12 Inventory

Example 17: Recognition as expense 1,000,000 units of paper were purchased for R500, 000 on 5 April 2010. At 28 June 2010, the entity sells 300,000 units of paper. The entitys reporting date is 30 June. Journal entries: The journal entries would be as follows: 5 April 2010 Inventory (asset) Bank Debit R 500,000 500,000 Credit R

28 June 2010 Stationery (expense) Inventory (asset) (300,000 x R0.5)

Debit R 150,000

Credit R 150,000

Disclosure: The disclosure in the statement of financial performance will be as follows. Extract from Statement of financial performance Cost of sales Consumables 150,000 Note 2010 R 2009 R

In the statement of financial position, the value of the paper on hand (R350,000) will be included in the inventory note as a separate line item.

10.

DISCLOSURE
Inventory disclosed in the notes to the financial statements should be separately disclosed per class. Common classifications of inventories are merchandise, production supplies, finished goods, materials and work-in-progress.

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GRAP 12 Inventory

Illustrative example of disclosure required (refer to the standard for detail): Extract from Statement of Financial Position Note 20x1 R Current assets Inventories 4 100,000 146,000 20x0 R

Extract from Statement of Financial Performance Note 20x1 R Revenue Expenses Cost of inventory Accounting policies 1.5 Inventories Accounting policy should include as a minimum: What is included in the cost of inventory; The cost formula used; and When is inventory being written-down? 15 1,827,000 XX 20x0 R

For example: Inventories are stated at the lower of cost and net realisable value. Cost of manufacturing includes direct materials, direct cost of conversion and a proportion of manufacturing overhead, based on normal operating capacity. Cost is determined on a weighted average cost basis. Any write-down to net realisable value is recognised in surplus or deficit. Extract from Notes to Financial Statements 4. Inventories 20x1 R Raw materials Work-in-progress Finished goods Consumable stores 20,000 10,000 60,000 10,000 100,000
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20x0 R XX XX XX XX 146,000
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GRAP 12 Inventory

Include the nature of inventories written-down to net realisable value or current replacement cost, and in the case of a reversal, the nature and reasons for the reversal. 15. Cost of inventory 20x1 R Consumables used Cost of sales of finished goods Labour Fixed production overhead costs Variable production overhead costs Opening inventory Closing inventory Raw materials write-down to net realisable value Reversal of inventory write-down Under-recovery of fixed production overhead costs Abnormal spillage of raw materials Inventory stolen Total cost of inventory 94,682 1,653,428 485,328 540,000 582,100 146,000 (100,000) 46,210 (21,800) 36,100 8,200 10,180 1,827,000 20x0 R XX XX XX XX XX XX (146,000) XX (XX) XX XX XX XXX

11. RECOMMENDED CONTROLS

The following are examples of controls or procedures an entity can implement to assist in inventory management: Appoint or designate an inventory manager; Have an inventory management policy; Implement controls over the safeguarding of assets; Ensure there is maintenance of records over inventory movement; Perform inventory counts periodically to ensure that actual inventory agrees with theoretical inventory records and to ensure inventory is still in the condition as intended by management (i.e. not obsolete); and Annual review of inventory management policy. Approval of write-offs due to obsolescence or damage

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GRAP 12 Inventory

12. INVENTORY SYSTEMS

There are two types of inventory systems, periodic inventory system and perpetual inventory system. The main differences between the two systems are as follows: Perpetual inventory system Purchased item is recorded in inventory account When goods sold, inventory account is reduced When goods are returned to supplier, the inventory account is adjusted Periodic inventory system Purchased item is recorded in a purchase account Purchase account is not adjusted when goods are sold A purchase return account is used for goods returned

When goods are returned by the customers, When goods are returned by the customer, the cost of sale account is reduced the purchase account is increased Cost of sale amount is available all the time Cost of sale is only determined when the physical inventory count is performed

Under the perpetual inventory system, the inventory on hand at year end can be calculated by using this formula: inventory at the beginning of the period + purchases during the period cost of sales = inventory at the end of the period This balance can then be verified by performing a stock count, any difference between the physical stock count and theoretical amount (determined by the formula or on an entitys system) will most likely be as a result of theft and/or losses and/or calculation errors. Assume that the opening balance of inventory on hand as at 30 June 2009 was R55, 000. During the period, the entity purchased inventory to the value of R215, 000. The physical stock count as at 30 June 2010 reflected 30,000 units on hand at R6 per unit. Assume that the 15,000 units were sold during the period at R7 per unit. Cost of inventory sold (cost of sales): R90,000 (15,000 x R6) Value of sales: R105,000 (15,000 x R7) The closing balance of inventory on hand (theoretical) as at 30 June 2010 will be: R55,000 + R215,000 R90,000 = R180,000 Units on hand will be 30,000 at R6 per unit.

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GRAP 12 Inventory

Under the periodic inventory system, the cost of sales for the period can be calculated by using this formula: inventory at the beginning of the period + purchases during the period inventory at the end of the period = cost of sales The inventory account is only updated once the physical stock count is performed. Assume that the opening balance of inventory on hand as at 30 June 2009 was R55, 000. During the period, the entity purchased inventory to the value of R215, 000. The physical stock count as at 30 June 2010 reflected 30,000 units on hand at R6 per unit, therefore R180, 000. The cost of sales for the period ending 30 June 2010 will be: R55,000 + R215,000 R180,000 = R90,000 As can be seen, no matter which inventory system is used, the amount for cost of sales (R90, 000) will be the same, the method of calculation is the only difference.

13. ENTITY-SPECIFIC GUIDANCE

Entity-specific guidance has been included where appropriate to provide specific guidance on a subject that only relates to those types of entities.

13.1

Municipalities

Accounting for water stock by municipalities Water stock must be accounted for as inventory. This will include water purchased and not yet sold at reporting date insofar as it is stored (controlled) in reservoirs and pipes at year end. Water stock also includes any water purification costs incurred for non-purchased water. Pre-purified, non-purchased water should not be capitalised as part of inventory. The cost of water purchased and not yet sold at reporting date comprises the purchase price, import duties and other taxes (other than those subsequently recoverable by the municipality from the taxing authorities, such as VAT) and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Importantly, trade discounts, rebates and other similar items are deducted in determining the costs of purchase.

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GRAP 12 Inventory

Valuation of purchased and purified water stock

1. The capacity (volume) of water that is stored (controlled) in reservoirs and pipes needs to be calculated.

2. Municipalities that purify and purchase water should determine the mix of purified vs. purchased water controlled by the municipality.

3. Determine what valuation methodology will best serve to value water on hand i.e. production cost per unit, FIFO or weighted average method. The municipality must use the same cost formula for all inventories having a similar nature and use to the municipality. 4. Value purified water on hand at year end by determining a production cost per unit of water purified and then applying this to the volume of purified water on hand at year end. 5. Closing inventories of purchased water, where the price of water purchased during the year differs from one purchase to the next, needs to be valued by using either the FIFO or the weighted average method. 6. Where the municipality is unable to assign purification cost to specific volumes of water purified, the weighted average method will be a more practicable approach.

Figure 3 steps for valuating water stock Further detail on step 1: Detailed plans of the municipalitys water reticulation systems needs to be obtained which indicate the length and diameter of the water pipes used in the reticulation system. The volume of water stored in the pipes needs to be calculated based on these detailed plans. If detailed plans of the municipalitys water reticulation system are not available, then the municipalitys engineering department or a consulting firm needs to be appointed for the re-measurement and drafting of these plans. All reservoirs of the municipality need to be identified and each reservoirs capacity should be determined. Dip readings should be taken at every reservoir as at 30 June each year.

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GRAP 12 Inventory

Further detail on step 2: The municipality should ensure that systems are in place to determine what percentage of water on hand at year end has been purchased and what percentage has been produced (purified). Water stock that was purchased should be disclosed at cost in the annual financial statements. Purified, non-purchased water should be disclosed at purification cost in the annual financial statements. Further detail on step 4: The production cost per unit must be based on: Cost directly related to the units of production such as direct materials and direct labour. This could include expense items such as wage costs of plant workers and chemicals used in the production process. Another example is the DWAF monthly fee paid for the volume of water purified. A systematic allocation of fixed production overheads, which are indirect costs of production that remain relatively constant, provided the level of production approximates normal capacity, such as depreciation of manufacturing equipment and the production facility (water purification plant). A systematic allocation of variable production overheads, which are indirect costs of production that vary in accordance with variances in the volume of production. Examples are indirect labour such as the salary of a factory foreman, and also indirect materials. Further detail on step 5: The FIFO method will most likely present the most accurate cost calculation for purchased water as water that is purchased first is also sold first. Thus value purchased water at year end by utilising the FIFO methodology and multiplying purchased water on hand at year-end with the latest purchase price.

14. SUMMARY OF KEY PRINCIPLES

GRAP 12 provides guidance on the accounting treatment for inventories - the costs to be recognised in inventory as an asset and the subsequent recognition as an expense, as well as any write-down to net realisable value. It also contains guidance on the cost formulas used to assign costs to inventory.

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GRAP 12 Inventory

14.1

Scope
Excludes Work-in-progress from construction contracts; Financial instruments; and Biological assets at the point of harvest.

Includes: Inventories held for sale or distribution in the ordinary course of operation or rendering of services; Material or supplies to be consumed in the production process; and Inventories to be consumed in the ordinary course of operations.

Measurement principles excluded for: Mining, mineral, forestry and agricultural products measured at net realisable value; and Inventory commodity broker-traders.

14.2

Definition and identification

To classify an asset as inventory, management should consider the definition, nature, timing and materiality of the item. Inventory types: Assets held for sale or distribution in the E.g. finished goods ordinary course of business Assets in the production process for sale or E.g. work-in-progress distribution Materials and supplies production process consumed in E.g. raw materials and consumable spare parts or E.g. consumable stores

Materials and supplies consumed distributed in the rendering of services

14.3

Recognition and measurement

Inventory is recognised when it meets the definition and recognition criteria: it is probable that future economic benefits or service potential will flow to the entity and its cost or fair value can be measured reliably. Inventory is initially recognised at cost, except when it is acquired at no cost in which case it is recognised at fair value. Inventory is reflected at the lower of cost and net realisable value or current replacement cost where inventory is held at no or nominal charge. Inventory is managed, accounted for and calculated by using either the perpetual or periodic inventory system.

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GRAP 12 Inventory

Once inventory is sold, consumed, distributed, etc., it is recognised as an expense in the statement of financial performance. Costs include: Cost of purchase; Cost of conversion; Other cost; and Excludes abnormal spillages, selling expenses, admin overheads, etc. For joint-products, costs are allocated based on sales value. For by-products the net realisable value is deducted from cost of the main product.

Net realisable value: Selling price less costs to sell; Consider events after the reporting date; Consider the purpose for which inventory is held; and Net realisable value of raw material only written down if the net realisable value of finished goods is lower than cost

Current replacement cost: Cost entity would incur to acquire inventory on reporting date

Cost technique: Standard cost

Cost formulas: Specific identification, FIFO, Weighted average

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