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AASB 102 - Inventories
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Summary 
Developments, Key Differences & History 
Compared to IFRS 
Interpretations 
Rejection Notices 
Questions & Answers 
Articles 
AASB website 

 
Determining NRV for inventory 
as reported in ANT22/2008 
 
When determining net realisable value (NRV) for inventory is it appropriate to include a reasonable profit allowance as part of ‘estimated costs to make the sale’ by analogy to AASB 3 Business Combinations? 
 
A: No. It is not appropriate to drawn an analogy with AASB 3 to resolve this issue. 
 
Paragraph B16 (d)(i) of AASB 3 Business Combinations states that for determining the fair value of finished goods and merchandise the acquirer shall use the selling price less the sum of the costs of disposal and a reasonable profit allowance for the selling effort of the acquirer based on profit for similar finished goods and merchandise. However this paragraph only applies only when establishing fair value in a business combination. 
 
To determine the NRV for inventory the relevant guidance is paragraph 6 of AASB 102 Inventories. This paragraph defines net realisable value as ‘the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale’. Accordingly a profit allowance for selling effort is not deducted from estimated selling price to arrive at NRV. 
 
 
Inventory valuation for tax vs accounting 
as reported in ANT45/2006 
 
Q: I understand there is a new tax ruling - TR 2006/8 - to do with absorption costing for retailers and wholesalers. Apparently the ATO says to use absorption costing for wholesalers, on the grounds that this is the same treatment as under the accounting standard.<p> 
 
However, the basis for absorption costing seems different - is this so? 
 
A: The Institute's view is that TR 2006/8 is not consistent with AASB 102 Inventories. The major difference is that AASB 102 specifically excludes storage costs from the cost of inventories, whereas TR 2006/8 includes these costs. Other differences are that some non-deductible costs that are absorbed for accounting purposes are excluded for tax purposes eg provision for holiday pay, provision for restoration costs, the difference between depreciation rates/methods for accounting and tax purposes etc. 
 
To quote from the tax ruling: 'The value of a taxpayer's trading stock in its financial accounts is not necessarily its value for taxation purposes'. 
 
Background:  
 
Tax ruling TR 2006/8 Income tax: the cost basis of valuing trading stock for taxpayers in the retail and wholesale industries. 
 
Taxpayers in the retail and wholesale industries who choose to value their trading stock on hand at year-end at cost for income tax purposes should use absorption costing. Under absorption costing, the costs to be absorbed for income tax purposes include the cost of purchase and any direct or indirect expenses incurred in relation to the trading stock in the normal course of operations in bringing the trading stock to a saleable condition and to its existing location. In a retail or wholesale business, these include:
     
  • the purchase price;  
  • import duties and taxes (other than those subsequently recoverable
  • from tax authorities, such as GST);  
  • inwards transport and handling charges;  
  • insurance on the trading stock while in transit;  
  • adjustments and assembly costs incurred in preparing the trading stock for sale;  
  • relevant costs incurred in operating a purchasing department; and  
  • administrative costs associated with receiving and inspecting the trading stock.
In addition, distribution centre and off-site storage costs should be apportioned across the relevant trading stock.  
(TR 2006/8 (paragraph 7)) 
 
 
Not-for-profits under AIFRS standards 
as reported in ANT13/2005 
 
Q: How are “not for profits” (NFPs) affected by the new Australian equivalents to International Financial Reporting Standards (AIFRS) standards? 
 
A: Since the AASB has the power to issue sector neutral standards i.e. standards to cover reporting entities in the private and public sector, “not for profit” reporting entities are covered by and will be required to comply with the new AIFRS. An NFP is defined as “an entity whose principal objective is not the generation of profit”. 
 
As part of the convergence process the AASB has included special requirements for NFP's into the new standards where these are appropriate to allow for this sector's special needs. These are generally special paragraphs inserted with the notation “AUS” prior to the number. These standards also contain the “not for profit” definition. An example is paragraph 9.1 of AASB 102 which allows NFP's to measure inventories held for distribution at the lower of cost and current replacement cost rather than the normal “cost and net realisable value” calculation. 
 
The AASB has also exempted NFP's from two standards, AASB 114 “Segment Reporting” and AASB 120 “Government Grants”. However it has also issued AASB 1004 “Contributions” which deals with the accounting treatment for contributions received by not-for-profits. All the remaining AASB standards and their requirements apply to NFP's in the same way as for profit entities. 
 
The AASB has recently published a staff paper identifying all the NFP requirements that are contained in the standards and explaining the reasons for their existence. It also provides guidance to NFPs with “for profit” subsidiaries by comparing all the relevant different requirements which may impact their consolidation. The paper can be downloaded from the AASB website http://www.aasb.com.au. 
 
 
Inventories Provision 
as reported in ANT03/2005 
 
Q: Under previous accounting standards, the notes to the accounts showed the gross amount of inventory less the provision for obsolescence. However, in examining some model IFRS accounts, the provision is not included in the notes and only the net amount is showing. I have found no assistance from the disclosure requirements in AASB 102 “Inventories”. 
 
Is there no need to show the inventory provision in the notes under IFRS or is the provision hidden somewhere else where I can’t find it? 
 
A: Although inventories are required to be recognised at the lower of cost and net realisable value in accordance with AASB 101 “Presentation of Financial Statements” and AASB 102 “Inventories”, there is no requirement to show the write-down in the balance sheet disclosure. This is likely due to the definition of “provision” as distinct from a write-down, however it is still a requirement to show the current year’s write-down expense. Similarly, AASB 136 “Impairment of Assets” on impairment appears to only require disclosure of the expense. 
 
 
Not-for-Profit Definition 
 
Q: I am looking for a definition of the term "not-for-profit", used in the standards. Can you help? 
 
A: The definition is located in each standard that uses it, but which applies to both for-profit and not-for-profit entities - see AASBs 102, 116, 136.