Statistics Act, 1999
R 385
Public Finance Management Act, 1999 (Act No. 1 of 1999)NoticesStandards of Generally Accepted Municipal Accounting Practice (GAMAP) in terms of Section 91GAMAP 12 : Inventories |
Introduction
Standards of Generally Accepted Municipal Accounting Practice (GAMAP)
The Accounting Standards Board (Board) is required in terms of the Public Finance Management Act, Act No. 1 of 1999, as amended (PFMA), to determine generally recognised accounting practice referred to as Standards of Generally Recognised Accounting Practice (GRAP).
The Board must determine GRAP for:
| (a) | departments (national and provincial); |
| (b) | public entities; |
| (c) | constitutional institutions; |
| (d) | municipalities and boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality: and |
| (e) | Parliament and the provincial legislatures. |
The above are collectively referred to as "entities" Standards of GRAP.
The Board considers that the Standards of GAMAP constitute GRAP for municipalities.
GAMAP is an interim solution until such time as it is replaced by a Standard of GRAP.
Any limitation of the applicability of specific Standards is made clear in those Standards.
The Standard of GAMAP on Inventories is set out in paragraphs .01 - .48. All paragraphs in this Standard have equal authority. The authority of appendices is dealt with in the preamble to each appendix. This Standard should be read in the context of its objective, the Preface to Standards of GRAP, the Preface to Standards of GAMAP and the Framework for the Preparation and Presentation of Financial Statements.
Reference may be made here to a Standards of GRAP that has not been issued at the time of issue of this Standard. This is done to avoid having to change the Standards already issued when a later Standard is subsequently issued. Paragraph .12 of the Standard of GRAP on Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
Objective
The objective of this Standard is to prescribe the accounting treatment for inventories under the historical cost system. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised. This Standard provides practical guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.
Scope
| .01 | An entity which prepares and presents financial statements under the accrual basis of accounting shall apply this Standard in the context of the historical cost system in accounting for inventories other than: |
| (a) | Work in progress arising under the construction contracts, including directly related service contracts (see the International Public Sector Accounting Standard on Construction Contracts for guidance), |
| (b) | Financial instruments (see the International Accounting Standard on Financial Instruments: Recognition and Measurement for guidance), |
| (c) | Producers' inventories of livestock, agricultural and forest products, and mineral ores to the extent that they are measured at net realizable value in accordance with well established practices in certain industries (see the International Accounting Standard on Agriculture for guidance), and |
| (d) | Work in progress of services to be provided for no or nominal consideration directly in return from the recipients. |
| .02 | The inventories referred to in paragraph .01(d) are not encompassed by the International Public Sector Accounting Standard on Inventories and are excluded from the scope of this Standard because they involve specific public sector issues that require further consideration. |
Definitions
| .03 | The following terms are used in this Standard with the meanings specified: |
Current replacement cost is the cost the entity would incur to acquire the asset on the reporting date.
Inventories are assets:
| (a) | in the form of materials or supplies to be consumed in the production process, |
| (b) | in the form of materials or supplies to be consumed or distributed in the rendering of services, |
| (c) | held for sale or distribution in the ordinary course of operations, or |
| (d) | in the process of production for sale or distribution. |
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.
| .04 | Inventories encompass goods purchased and held for resale including, for example, refuse bags purchased by the entity and held for resale, or land held for sale, water, and other property held for sale. Inventories encompass finished goods produced, or work in progress being produced by the entity. Inventories also include materials and supplies awaiting use in the production process and goods purchased or produced by the entity, which are for distribution to other parties for no charge or for a nominal charge. In many entities inventories will be held for the consumption in the provision of service. In the case of a service provider, inventories include the costs of the service, as described in paragraph .23, for which the entity has not yet recognised the related revenue. |
| .05 | Inventories in the public sector may include: |
| (a) | ammunition, |
| (b) | consumable stores, |
| (c) | maintenance materials, |
| (d) | spare parts for plant and equipment other than those dealt with under the Standard of Generally Accepted Municipal Accounting Practice on Property, Plant and Equipment, |
| (e) | strategic stockpiles, |
| (f) | work in progress, and |
| (g) | land/property held for sale. |
| .06 | When the entity maintains strategic stockpiles of various reserves, such as energy reserves or minimum water reserves for use in emergency or other situations (for example, natural disasters or other civil defence emergencies), these stockpiles are recognised as inventories for the purposes of this Standard and treated accordingly. |
Measurement of inventories
| .07 | Inventories shall be measured at the lower of cost and net realisable value, except where paragraph .08 applies. |
| .08 | Inventories shall be measured at the lower of cost and current replacement cost where they are held for: |
| (a) | distribution at no charge or for a nominal charge, or |
| (b) | consumption in the production process of goods to be distributed at no charge or for a nominal charge. |
Cost of inventories
| .09 | The cost of inventories shall comprise all costs of purchase, costs of development, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. |
Costs of purchase
| .10 | 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 supplies. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase. |
| .11 | The costs of purchase may include foreign exchange differences which arise directly on the recent acquisition of inventories invoiced in a foreign currency in the circumstance permitted in the allowed alternative treatment in the Standard of Generally Accepted Municipal Accounting Practice on The Effects of Changes in Foreign Exchange Rates. These exchange differences are limited to those resulting from a severe devaluation or depreciation of a currency against which there is no practical means of hedging and that affects liabilities which cannot be settled and which arise on the recent acquisition of the inventories. |
Costs of development
| .12 | The cost of land development for housing or similar developments which are acquired or developed for resale will include costs directly related to the development. These direct costs will include the purchase price of land acquired for such developments, surveyancing and conveyancing costs and the provision of certain infrastructure. They also include an allocation of development overheads that are incurred in facilitating such developments. The allocation of costs, both fixed and variable, incurred in the development of undeveloped land held for sale into residential or commercial landholdings, could include costs relating to landscaping, drainage, pipe laying for utility connection, etc. Infrastructure costs that relate to extending the capacity of existing infrastructure would be excluded from development costs. For example, the extension of the road network to link up to the roads constructed on the land being developed cannot be included as a cost of development. A further example would be the extension of a water purification plant to handle the increased consumption expected from a housing development; it would be inappropriate to include such amounts as development costs. A factor to take into account when determining the cost of providing infrastructure will be ownership and right of use. If the entity retains the risk and rewards of ownership of infrastructure developed, then the costs of this infrastructure should not be treated as a cost of development. |
| .13 | It is only appropriate to allocate development overhead costs where these costs are separately identifiable and development occurs on a frequent basis, it would be inappropriate to allocate overheads to developments where overheads would normally be treated as a normal operational expense. |
| .14 | When entity owned land is used for housing or other developments, the book value of such land should be transferred from property, plant and equipment to inventory. No adjustments to the carrying value of the land should be made. If such land had previously been revalued, the revaluation reserve relating to such land should be retained until the land has been sold. |
| .15 | The classification between land included under inventory, land included under property, plant and equipment and investment properties requires careful consideration. Where an entity owns undeveloped land, usually this will be classified as property, plant and equipment. Where there is an intention to develop such land and to sell or transfer or contract it to a third party it should be classified as inventory rather than property, plant and equipment. |
| .16 | Where an entity develops land in anticipation of encouraging or facilitating economic or housing development, and it is probable that such developed land will not be sold or transferred to a third party within the short term, then the land and subsequent costs of development should be classified in terms of the Standard of Generally Accepted Municipal Accounting Practice on Property, Plant and Equipment until construction or development is complete where after it should be classified as an investment property (see the International Public Sector Accounting Standard on lnvestment Property for guidance). |
| .17 | The purchase of land or buildings for resale should be classified as inventory if the land or buildings is held for short-term sale in the ordinary course of operations. If the land or buildings are held for long-term capital appreciation, the land and buildings should be classified as investment properties (see the International Public Sector Accounting Standard on lnvestment Property for guidance). |
Costs of conversion
| .18 | The costs of converting work-in-progress inventories into finished goods inventories are incurred primarily in a manufacturing environment, for example energy produced from coal. The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and equipment, and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour. |
| .19 | The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the 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. The actual level of production may be used if it approximates normal capacity. The amount of fixed production overheads allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities. |
| .20 | 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 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. |
Other costs
| .21 | Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include non-production overheads or the costs of designing products for specific customers in the cost of inventories. |
| .22 | Examples of costs excluded from the cost of inventories and recognised as expenses in the 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 in the production process prior to a further production stage, |
| (c) | administrative overheads that do not contribute to bringing inventories to their present location and condition, and |
| (d) | selling costs. |
Cost of inventories of a service provider
| .23 | The cost of inventories of a service provider consists primarily of the labour and other costs of personnel directly engaged in providing the service, including supervisory personnel, and attributable overheads. The costs of labour not engaged in providing the service are not included. Labour and other costs relating to sales and general administrative personnel are not included but are recognized as expenses in the period in which they are incurred. |
Techniques for the measurement of cost
| .24 | Techniques for the measurement of the cost of inventories, such as the standard cost method or the retail method, may be used for convenience if the results approximate cost. Standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions. |
| .25 | The retail method is often used in the retail industry for measuring inventories of large numbers of rapidly changing items that have similar margins, and for which it is impractical to use other costing methods. The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margin. The percentage used takes into consideration inventory that has been marked down to below its original selling price. An average percentage for each retail department is often used. |
Cost formulas
| .26 | The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs. |
| .27 | Specific identification of cost means that specific costs are attributed to identified items of inventory. This is an appropriate treatment for items that are segregated for a specific project. The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by using specific identification of their individual costs. However, specific identification of costs is inappropriate when there are large numbers of items of inventory which are ordinarily interchangeable. In such circumstances, the method of selecting those items that remain in inventories could be used to obtain predetermined effects on the surplus or deficit for the period. |
| .28 | When applying paragraph .29 an entity shall use the same cost formula for all inventories having similar nature and use to the entity. For inventories with different nature or use (for example, certain commodities used in one segment and the same type of commodities used in another segment), different cost formulas may be justified. A difference in geographical location of inventories (and in the respective fax rules), by itself is not sufficient to justify fie use of different cost formulas. |
| .29 | The cost of inventories, other than those dealt with in paragraph .26 shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formulas. |
| .30 | The FIFO formula assumes that the items of inventory that were purchased first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the entity. |
Net realisable value
| .31 | The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale, exchange or distribution have increased. The practice of writing inventories down below cost to net realisable value is consistent with the view that assets should not be carried in excess of the future economic benefits or service potential expected to be realised from their sale, exchange, distribution or use. |
| .32 | Inventories are usually written down to net realisable value on an item basis. In some circumstances, however, it may be appropriate to- group similar or related items. This may be the case with items of inventory that have similar purposes or end uses and cannot practicably be evaluated separately from other items in that product line. It is not appropriate to write inventories down based on a classification of inventory, for example, finished goods or all the inventories in a particular operation or geographical segment. Service providers generally accumulate costs in respect of each service for which a separate selling price may be charged. Therefore, each such service is treated as a separate item. |
| .33 | Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made as to the amount the inventories are expected to realise. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period. |
| .34 | Estimates of net realisable value also take into consideration the purpose for which the inventory is held. For example, the net realisable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, the net realisable value of the excess is based on general selling prices. Guidance on the treatment of provisions or contingent liabilities, such as those arising from firm sales contracts in excess of i quantities held, and on firm purchase contracts can be found in the Standard of Generally Accepted Municipal Accounting Practice on Provisions, Contingent Liabilities and Contingent Assets. |
| .35 | Materials and other supplies held for use in the production of inventories are not written down below the finished products in which they will be incorporated are expected to be sold, exchanged or distributed at or above cost. However when a decline in the price of materials indicates that the cost of the finished products will exceed net realisable value, the materials are written down to net realizable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value. |
| .36 | A new assessment is made of net realisable value in each subsequent period. When the circumstances that previously caused inventories to be written down below cost no longer exist, the amount of the write-down is reversed so that the new carrying amount is the lower of the cost and the revised net realisable value. This occurs, for example, when an item of inventory, which is carried at net realisable value because its selling price has declined, is still on hand in a subsequent period and its selling price has increased. |
Distributing goods at no charge or for a nominal charge
| .37 | An entity may hold inventories whose future economic benefits or service potential are not directly related to their ability to generate net cash inflows, for example medicine for children in a clinic. These types of inventories may arise when the entity has determined to distribute certain goods at no charge or for a nominal amount. In these cases, the future economic benefits or service potential of the inventory for financial reporting purposes is reflected by the amount the entity would need to pay to acquire the economic benefits or service potential if this was necessary to achieve the objectives of the entity. Where the economic benefits or service potential cannot be acquired in the market, an estimate of replacement cost will need to be made. If the purpose for which the inventory is held changes, then the inventory is valued using the provisions of paragraph .04. |
Recognition as an expense
| .38 | When inventories are sold, exchanged or distributed the carrying amount of those inventories shall be recognised as, an expense in the period in which the related revenue is recognised. If there is no related revenue, the expense is recognised when the goods are distributed or related service is rendered. The amount of any write-down of inventories and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. |
| .39 | The process of recognising as an expense the carrying amount of inventories sold, exchange or distributed results in the matching of costs and revenues. For a service provider, the point when inventories are recognised as expenses normally occurs when services are rendered, or upon billing for chargeable services. |
| .40 | Some inventories may be allocated to other asset accounts, for example, inventory used as a component of self-constructed property, plant or equipment. Inventories allocated to another asset in this way are recognised as an expense during the useful life of that asset. |
Disclosure
| .41 | The financial statements shall disclose the following: |
| (a) | The accounting policies adopted in measuring inventories, including the cost formula used, |
| (b) | The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity, |
| (c) | The amount of any reversal of any write-down which is recognised as revenue in the period in accordance with paragraph .38, |
| (d) | The circumstances or events that led to the reversal of a write-down of inventories in accordance with paragraph .38, and |
| (e) | The carrying amount of inventories pledged as security for liabilities. |
| .42 | Information about the carrying amounts held in different classifications of inventories and the extent of the changes in these assets is useful to financial statement users. Common classifications of inventories are merchandise, production supplies, materials, work in progress and finished goods. The inventories of a service provider may simply be described as work in progress. |
| .43 | The financial statements shall disclose either: |
| (a) | the cost of inventories recognised as an expense during the period, or |
| (b) | the operating costs applicable to revenues, recognised as an expense during the period, classified by their nature. |
| .44 | The cost of inventories recognised as an expense during the period consists of those costs previously included in the measurement of the items of inventory sold, exchanged or distributed, and unallocated production overheads and abnormal amounts of production costs of inventories. The circumstances of the entity may also warrant the inclusion of other costs, such as distribution costs. |
| .45 | Some entities adopt a different format for the statement of financial performance, which results in different amounts being disclosed instead of the cost of inventories recognised as an expense during the period. Under this different format, an entity discloses the amounts of operating costs applicable to revenues for the period, classified by their nature. In this case, the entity discloses the costs recognised as an expense for raw materials and consumables, labour costs and other operating costs together with the amount of the net change in inventories for the period. |
| .46 | A write-down to net realisable value may be of such size, incidence or nature to require disclosure under the Standard of Generally Recognised Accounting Practice on Accounting Polices, Changes in Accounting Estimates and Errors. |
Transitional Provisions
| .47 | On the occasion of first-time application of this Standard all provisions of the Standard shall be applied prospectively. However, when the first time application of this Standard results in a change in accounting policy or estimate, reference shall be made to the Standard of Generally Recognised Accounting Practice on Accounting Policies, Changes in Accounting Estimates and Errors. |
Effective date
| .48 | This Standard of Generally Accepted Municipal Accounting Practice becomes effective for annual financial statements covering periods beginning on or after a date to be determined by the Minister of Finance in a regulation to be published in accordance with section 91(1)(b) of the Public Finance Management Act, Act No. 1 of 1999 as amended. |
