Chapter 8


Sec. 1. Scope.This Chapter covers thedefinition, recognition, measurement, cost formulas to be used and related disclosure requirement in accordance with PPSAS 12 on Inventories. It includesspecific guidelines and procedures on acquisition,issue, disposal and impairment of inventory and defines the benchmark for those tangible items not enough to be considered as Property, Plant and Equipment (PPE).

Sec. 2. Definition of Terms. For the purpose of this Manual, the terms used as stated below shall be construed to mean as follows: (par. 9, IPSAS 12)

a. Current Replacement Cost - isthe cost the entity would incur to acquire the asset on the reporting date. (par. 9, IPSAS 12)

b. Fair Value- is the amount for which the same inventory could be exchanged between knowledgeable and willing buyers and sellers in the marketplace.

c. Inventories are assets:

1. In the form of materials or supplies to be consumed in the production process (examples: materials and supplies awaiting use in the production process);

2. In the form of materials or supplies to be consumed or distributed in the rendering of services (examples: office supplies, ammunitions, maintenance materials);

3. Held for sale or distribution in the ordinary course of operations (examples: merchandise purchased by an entity and held for resale, or land and other property held for sale, agricultural produce); or

4. In the process of production for sale or distribution (examples: goods purchased or produced for distribution to other parties for no charge or for a nominal charge like educational books produced by a health authority for donation to schools).

d. Net Realizable 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. It is the net amount that anentity expects to realize from the sale of inventory in the ordinary course of operations. (pars. 9 & 10, IPSAS 12)

e. Perpetual Inventory System - is a system that continually tracks all additions to and deletions from inventory

Sec. 3. Cost of Inventories. The cost of inventories shall comprise all costs of purchase, costs of conversion (materials, labor and overhead) and other costs incurred in bringing the inventories to their present location and condition, excluding abnormal amounts of wasted materials, labor, other production and selling costs, administrative overheads that do not contribute to bringing inventories to their present location and condition. Trade discounts, rebates, and other similar items are deducted in determining the costs of purchase. (pars. 18, 19&25, IPSAS 12)

Sec. 4. Measurement. Inventories shall be measured as follows:

a. At the lower of cost and net realizable value. However, where inventories are acquired through a non-exchange transaction, their cost shall be measured at their fair value as at the date of acquisition;(pars. 15-16, IPSAS 12)

b. At the lower of cost and current replacement cost where they are held for distribution at no charge or for a nominal charge, or for consumption in the production process of goods to be distributed at no charge or for a nominal charge; or (par. 17, IPSAS 12)

c. In accordance with IPSAS 27, inventories comprising agricultural produce that an entity has harvested from its biological assets shall be measured on initial recognition at their fair value less costs to sell at the point of harvest. (par. 29, IPSAS 12)

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