Inventory Valuation Methods and Financial Reporting
Inventory Processing Costs
Processing costs of inventories include costs directly related to those units produced, such as direct labor. They also include systematically calculated indirect costs, both variable and fixed, which have been incurred to transform raw materials into finished products.
Systems for Cost Valuation
Systems for determining the cost of inventories, such as the standard cost method or the retail method, may be used for convenience if the results approximate the actual cost. Standard costs are established using normal levels of consumption of raw materials, supplies, labor, efficiency, and capacity utilization. In this case, calculation conditions are reviewed regularly and, if necessary, the standards are updated whenever those conditions change.
Net Realizable Value and Recoverability
Net realizable value: The cost of inventories may not be recoverable if they are damaged, become partially or wholly obsolete, or if their market prices have fallen. Additionally, the cost of inventories may not be recoverable if the estimated costs to completion or sale have increased. The practice of lowering the balance until the cost is equal to the net realizable value is consistent with the view that assets should not be carried at an amount exceeding the value expected to be obtained through their sale or use.
Recognition as an Expense
When the stock is sold, its carrying amount is recognized as an expense in the period in which the related revenue is recognized. The amount of any reduction in value to reach the net realizable value, along with all other losses in stock, shall be recognized in the year in which the write-down or loss occurs. The amount of any reversal of the reduction in value resulting from an increase in net realizable value is recognized as a reduction in the value of stocks that have been recognized as an expense in the period in which the reversal takes place.
Financial Statement Disclosures
Financial statements shall disclose the following information:
- (a) The accounting policy adopted for the valuation of stocks, including the formula used for cost valuation;
- (b) The total carrying amount of inventories and partial sums according to the classification appropriate for the entity;
- (c) The carrying amount of inventories carried at fair value less costs to sell;
- (d) The amount of inventories recognized as an expense during the period;
- (e) The amount of write-downs of inventories recognized as an expense in the year, in accordance with paragraph 34...