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AASB 102 - Inventories

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Text of the Standard 
Summary 
AIFRS compared to IFRS and old AGAAP 
Interpretations and guidance 
Questions and answers 
Articles 

 
Comparison Between AASB 102 and IAS 2 
Comparison by Jeffrey Knapp 
 
Background 
 
AASB 102 ‘Inventories’ is the Australian equivalent to IAS 2 of the same name. It was made by the AASB on 15 July 2004 as part the AASB’s program to adopt International Financial Reporting Standards by 2005.  
 
AASB 102 Compared to IAS 2 
 
Additions 
 
Paragraph Description 
 
Aus 1.1 Which entities AASB 102 applies to, ie. reporting entities and general purpose financial reports. 
 
Aus 1.2 The application date of AASB 102, ie. annual reporting periods beginning 1 January 2005. 
 
Aus 1.3 Prohibits early application of AASB 102. 
 
Aus 1.4 Makes the requirements of AASB 102 subject to AASB 1031 ‘Materiality’. 
 
Aus 1.5 Explains which Australian Standards have been superseded by AASB 102. 
 
Aus 1.6 Clarifies that the superseded Australian Standards remain in force until AASB 102 applies. 
 
Aus 1.7 Notice of the new Standard published on 22 July 2004. 
 
Aus 2.1 Excludes certain inventories of not-for-profit entities. 
 
Aus 6.1 Sets out the not-for-profit definitions of ‘not-for-profit entity’, ‘current replacement cost’ and ‘inventories held for distribution’. 
 
Aus 8.1 Explanation of why current replacement cost rather than net realisable value is appropriate for inventories held for distribution by not-for-profit entities. 
 
Aus 8.2 Clarifies that measurement of replacement cost by not-for-profit entities must reflect obsolescence or impairment. 
 
Aus 9.1 Measurement rule for inventories held for distribution by not-for-profit entities. 
 
Aus 10.1 Deemed cost of inventories acquired by not-for-profit entities at no or nominal consideration is replacement cost. 
 
Aus 34.1 Expense recognition rules for inventories held for distribution by not-for-profit entities. 
 
Aus 36.1 Disclosures required in respect of the inventories of not-for-profit entities. 
 
Deletions 
 
Paragraph Description 
 
40 Effective date of IAS 2. 
 
41 Reference to superseded IAS 2. 
 
42 Reference to superseded SIC Interpretation - SIC 1 ‘Consistency - Different Cost Formulas for Inventories’. 
 
 
 
Differences Between AASB 102 and AASB 1019 
Comparison from the Australian Accounting Standards Board 
 
This section identifies differences between AASB 1019 Inventories and AASB 102 Inventories under the following headings. 
 
A: Incompatibilities between AASB 1019 and AASB 102 
B: AASB 1019 is more detailed or restrictive 
C: AASB 102 is more detailed or restrictive 
D: AASB 1019 disclosures are more extensive 
E: AASB 102 disclosures are more extensive 
 
The analysis of differences should not be taken as providing an exhaustive list of differences. 
 
Introduction 
 
AASB 102 and AASB 1019 both deal with the recognition and measurement of inventories and related disclosures. 
 
Differences 
 
A. Incompatibilities between AASB 1019 and AASB 102 
 
A.1 Scope 
 
The scope of AASB 102 differs from that of AASB 1019 because: 
 
(a) AASB 102.3(a) excludes from its scope producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products to the extent that they are measured at net realisable value in accordance with well-established practices in those industries whereas AASB 1019 does not; and 
 
(b) AASB 102.3(b) excludes from its scope commodity broker-traders who measure their inventories at fair value less costs to sell whereas AASB 1019 does not. 
 
A.2 Retail inventory method 
 
The calculation of the cost of seasonal or slow moving inventories under the Retail Inventory Method (RIM) differs between AASB 102 and AASB 1019. Under AASB 102, the gross profit margin is reduced for these seasonal or slow moving items, whereas under AASB 1019, the gross profit margin remains the same. Consider the following example (See Table document below) 
 
Under this example, the normal case is that the company has $100 of inventory with a 40% margin (from AASB 1019, paragraph 6.3.2 “current average mark-up [margin] … expressed as a percentage of the selling price”) such that the cost of inventory is deduced to be $60. If the inventory is then marked down to $80 because it is seasonal or slow moving, AASB 102 assumes that the margin is reduced to 25% and the carrying amount of inventory remains $60. AASB 1019 assumes that the margin of 40% remains the same and the carrying amount of inventory decreases (even if this is below actual cost).  
 
A.3 Not-for-profit entities 
 
AASB 102 contains additional requirements and commentary applicable to not-for-profit entities that differs from AASB 1019. These are as follows: 
 
(a) AASB 102.Aus9.1 requires inventories held for distribution by not-for-profit entities to be measured at the lower of cost and current replacement cost whereas AASB 1019.5.1 requires all inventories to be measured at the lower of cost and net realisable value; 
 
(b) AASB 102.Aus34.1 requires not-for-profit entities with inventory held for distribution for no or nominal consideration to expense those inventories when the distribution of those inventories occurs or when the services are rendered whereas AASB 1019 does not include such requirements; and 
 
(c) AASB 102.Aus8.1 includes commentary that addresses the accounting for goods that are not directly related to a not-for-profit entity’s ability to generate profits and that are distributed for no or nominal consideration while AASB 1019 does not include such commentary. 
 
B. AASB 1019 is more detailed or restrictive 
 
B.1 Normal operating capacity 
 
AASB 1019.6.1.3 notes three factors to be considered for determining normal operating capacity. They are: 
 
(a) the volume of production which the production facilities are intended by their designers and by management to yield under the working conditions normally prevailing; 
 
(b) the budgeted level of activity for the current reporting period and for the ensuing reporting period; and 
 
(c) the level of activity achieved both in the current reporting period and in previous reporting periods. 
This guidance is additional to the guidance for determining normal operating activity provided in AASB 102.13.  
 
B.2 Determining selling price 
 
AASB 1019.8.1.1 comments on the use of selling price in the determination of net realisable value of inventories and notes three factors to be considered in determining selling price: 
 
(a) any existing contracts for future sales of items of inventory; 
 
(b) the general pattern of sales, inventories and discounts; and 
 
(c) fluctuations in the price of materials which will affect the selling price of items of inventory or where the raw materials are expected to be sold in their unprocessed state. 
 
AASB 102.30 does not provide the same level of guidance for estimating selling prices. 
 
B.3 Net realisable value formula 
 
AASB 1019.8.1.2 commentary provides detail about inclusions in the formula to determine net realisable value on initial calculation. For example, the formula would normally take into account, as appropriate, the age, past movements, expected future movements and estimated scrap values of the inventories, thereby establishing a basis which can be consistently applied. AASB 102 is silent on this matter. 
 
B.4 Circumstances that may cause net realisable value to be less than cost 
 
AASB 1019.8.1.3 identifies five principal situations in which the net realisable value of inventory is likely to be less than the cost of the inventory. These situations are: 
 
(a) a fall in selling price; 
(b) physical deterioration of inventories; 
(c) obsolescence of product; 
(d) a decision, as part of an entity’s marketing strategy, to manufacture and sell products for the time being at a loss; and 
(e) miscalculations or other errors in purchasing or production. 
 
AASB 102 does not comment on circumstances that may cause the net realisable value to be less than the cost of inventory. 
 
B.5 Spare parts 
 
AASB 1019.8.1.5 comments on matters that are relevant to the determination of the net realisable value of spare parts held for sale or for use in after-sales service. AASB 102 does not comment on these matters. 
 
C. AASB 102 is more detailed or restrictive  
 
C.1 Reversal of write-downs of inventory 
 
AASB 1019 implies that inventory write-downs can be reversed but does not explicitly require the reversal of such write-downs. However, AASB 102 requires the reversal of write-downs when the circumstances that previously caused inventories to be written down below cost no longer exist and requires disclosure of these reversals. This may occur when an item of inventory on hand experiences a price increase in a subsequent period while being carried at net realisable value due to its selling price previously declining. AASB 102 also requires disclosure of the amount of any write-downs. 
 
D. AASB 1019 disclosures are more extensive 
 
D.1 Sub-classification 
 
AASB 1019.10.1(e) requires the carrying amount of inventories that have been measured at net realisable value to be sub-classified in a manner appropriate to the entity’s operations. In contrast, whilst AASB 102.36(e) requires the disclosure of the carrying amount of inventories that have been measured at net realisable value, it does not require that they be sub-classified in a manner appropriate to the entity’s operations. 
 
E. AASB 102 disclosures are more extensive 
 
None noted.