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Treatment of under/over absorbed overheads

admin — Sat, 28 Feb 2009 07:20:41 +0000

Good luck For All,

Kindly Let me Know Is Any Indication of under/ over absorbed production overheads’ treatment in IFRSs. If yes Then What And In which one. If Not Then What Is The Proper treatment?

Regards
Naveed

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Treatment of Storage Costs

admin — Sun, 15 Feb 2009 18:30:51 +0000

Hi All,

Can someone advice the correct treatment of the below case under IFRS.

A company is trading in Fuel Oil. It purchases fuel oil, stores it in tanks and sells it.
As a result it incurs fuel costs and also storage costs (tank rentals).
In a particular transaction, the company purchased fuel oil in Dec 2008 and stored it in tanks hired particularly for this transaction and sold the fuel in Jan 2009.

The question is on the treatment of the storage costs (tank rentals) of the particular tank for the month of Dec 08.
Option 1 : The tank rental is a cost to sell as the purchase leg is complete when the fuel oil
hits the tank and the fuel oil is stored only for the purpose of sale. Also because the tank rental has already been incurred, it has to be treated as expenses in 2008 though the sale of fuel occurs only in 2009.
Option 2 : The tank rental is paid to store fuel oil and is easily identified to the inventory that is meant for sale and hence should be part of inventory cost and should be shown under Inventory in Balance sheet.
Option 3 : The tank rental is cost to sell as it is stored only for the purpose of sale. As the sale occurs only in 2009, and as the tank rental is easily identifiable to the particular sale, the tank rental should be considered under deferred costs in Balance sheet as of 2008 and should not be considered in PNL in 2008. It should be part of 2009 costs and is matched to the sales revenue in 2009.

Request your opinion on which option is the correct treatment of the tank rental under IFRS.

Please provide documentary evidence like extracts of accounting standards, if available.

Thanks

Regards

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Inventory Adjustment Entries

admin — Sun, 15 Feb 2009 10:24:10 +0000

Dears,

what are the adjusting enteries when inventry is recorded under perpatual system & when at the year end period count is performed & descripencies are found ehither favourable Or Unfavourable.

Best regards:

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Inventory valuation

deepak — Tue, 23 Dec 2008 08:48:16 +0000

A company yet to start production had bought some raw materials necessary for production. But the production has been delayed. In the mean time the market value of raw materials has came down. what should be the accounting treatment for the raw material at year end ?

should it be valued at current market price and difference be treated as pre-operative expense or some other treatment should be given ?

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Reversal of a previuos inventory writedown

admin — Sun, 14 Dec 2008 23:40:00 +0000

Dear All
Kindly feed me back regarding the reversal of any previuos writedown
that had been made in a previuos period. Is it possible to reverse a
wirte down for inventory made in 2007 to be reversed in 2008
Noting that I couldn’t reach any specific paragraph in the standards
relatated to this issue.
and how this could be made via entries.

But I think if it is possible to reverse wirtdown made in 2007 to be
reversed in 2008, it may distort results over accounting periods.

Thanks in advance for your prompt reply.

Hesham,
The writedown to inventory in 2007 impact is ultimately on the
retained earnings brought forward to 2008. Therefore the reversal
should be a credit to R/earnings.

Hope this help.

William

Hi Hesham,

As I am sure you are aware that IAS 2 requires inventories to be
carried at lower of cost(original cost) and net realisable value(NRV).
According to para 34 of IAS 2, ” The amount of any reversal of any
write-down of inventories, arising from the 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” .

This means that the reversal is limited to the previous write down. For example:

In 2007 the cost of inventories was 100 and the NRV was 80 resulting
in a 20 write down. Then, in 2008 circumstances changes and some how
the NRV was 150. The reversal of the write down will be limited to 20.

In this case the journal entry will be made in 2008 as follows:

Dr Inventories 20

Cr Reversal of write down ( Income Statement) 20

Shivan

Hi,

Do you mean that you are attempting to reverse a previously recognized
write down on inventories?

IAS 2 clearly states as follows.

IAS 2

Recognition as an Expense

34 When inventories are sold, the carrying amount of those
inventories shall be recognised as an expense in the period in which
the related revenue is recognised. The amount of any write-down of
inventories to net realisable value 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.

It is reversed to cost of sales (income statement).

It doesn’t distort the results per se, unless the write down has been
fraudulently performed or is an error.

Also, you are required to state down the reasons behind the reversal
of the written down amounts.

Also, if in doubt, follow the rules under IAS 8:

This is a “change in accounting estimate” and is therefore reversed to
the 2008 financial performance (Income Statement).

Note that retrospective adjustments (credits/debits to retained
earnings) are limited only to 3 situations:

- Changes in accounting policy

- Error

I hope this helps.

Regards,

Alan

The value of Stock should be increased and the balance in Profit &
Loss Account will also increase. This can be shown as prior period
items.

Thanks

B K

As per IFRS, this is not tobe shown as prior period items.
In fact, under IFRS there is no concept of prior period.

Dear all,

Can you send me all IAS documents so that I can print and have for
future reference.

Thanks

Hi Setota,

Please login to iasplus.com (by Deloitte), you will find wealth of
information about IFRS/IAS.

Thanks,

Thanks for your reply, but if we acted by adjusting the retained
earnings balance, we would treate it either as a change in accounting
principleas or as a prior period errors, wich is not the case. As all
amounts debited or credited dirctly to the RE (other than the
shareholders transactions) are either change in policies or prior
errors.

Lets decide first if it is possible to reverse a previuos inventory
write down or not
then we should decide to what account should the credit amount be
recorded. I think that if it is possible to reverse it, the credit
should be made to the same account (loss due to decline in the market
value of inventor),
Kindly feed me back.

Respected all,

I think it cannot be a prior period adjustment as the reversal took
this year, the increase-in-realisable-value event happened this year
due to which the reversal happened, so effect should be in current
year p/L account and inventory balance of balance sheet.

JATINDER

Write off to the inventory made last year cannot be reversed this year
until there is a proper justification to do so as it would affect the
P&L of LY as well as True and Fair Presentation of Financial
Statements, however if reversal is resorted that can be done thru
Prior Period Adjustment/Exps. account.

Regards
CMA

Dear All
A lot of thanks for your support. I can conclude that the reversal
should be recognizedin the crrent year P&L not as a prior period
adjustment.The enrty may be
Allowance due to decline in inventory value
Gain/loss due to decline in the inventory valueThanks

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Budget

ifrslist — Sun, 14 Dec 2008 22:28:00 +0000

Dear All

Can any body tell me that is budget only for expenses or can be for Asset, liabilities and income also. My openion is it can be for all (Asset, liability, Expense and income). Please help me according to the IAS/IFRS.

–
Best regards

Mohammad

Dear Mohammed :-

Budget can be to revenue& expenses but when we put assets & liabilities we can called it Feasibility study to project we make this in starting of any activity .

Best Regards
Aly

Budgets are prepared both for revenue and capital expenditure. Revenue Budget gives you the financial progress of the company and Capital Budgets are prepared to estimate the cash flow requirements for the ensuing year and capital investment a company is proposed during the year ahead.

Budgets are different from Feasibility studies, so don’t mix-up both. Budgets of Both Capital & Revenue are a regular and annual feature, whereas feasibility studies are need based and initiated when a project is proposed or an idea for a project is conceived.

Good Luck

Agree with Mr. Sekhar & add that,

Capital and revenue budgets are usually termed as Capex & Opex respectively.
Opex are simply Profit & Loss summaries, whereas Capex are not prepared like balance sheets and are just forecast for upcoming period/s Capital expenditure, (it is not needed to present the acquisition requirement of assets – i.e. either from Equity or Loan which is a feature of Financial Management).
If, however you add the cash flows from Capex & Opex it will help you to evaluate the feasibility (IRR, Payback, NPV) which is a requirement when a project is conceived/ proposed.

Hope answer the question.

Regards,

Muhammad

I am not sure if IFRS or IAS is in anyway concerned with BUDGET…mind you BUDGET is a Cost Management Tool and a part of management accounting(cost and management accounting).

Budget is prepared to arrive at planned profit from operation…essentially there is an income assessment…Budget also is prepared for capital expenditure funding and assessment of returns during the lifecycle of the Capital asset….but truely Asset and liability budget(nomencltured so) is not in existence to my knowledge.

Regards

R.Veeraraghavan

The IFRS/IAS does not deal with budgeting at all.

To open your guestion correct budgeting process deals with P&L, ballance sheet and cashflow.

The profit from your P&L effectivelly apperas as retained profit in your ballance sheet.

Assets, liabilities and P&L are direclty correlated.

Regards,

Jakub

Hi,

When budget or any financial projection or anyother alike document forms part of prospectus of any company opting for IPO, then audit of such budget or financial projections may attract compliance of relevant IASs and IFRSs.

Similarly, while conducting due-diligence on behalf of any public-interest-entity, the firm conducting DD may evaluate whether budget or financial projections (form part of future business plan, if any) are standards compliant or not. For example, non-compliance in Opex budgets may result inadequate provisions for taxation etc. or overstatement of future profits resulting in higher business price and non-compliance in Capex budget may result in many other serious issues.

Zulfiqar

You are right in saying that budgets can be for all the items of accounting equation that is assets, liabilities, income, expenses and even some times equity.

Let me explain with some examples;

1 Assets:

You can budget, especially in a growing company how many new machines you will buy or in a real estate business, new real estate that you intend to acquire and also how many of those you anticipate will be disposed off.

As far as IAS and IFRS are concerned, although there is no specific requirement to do budgeting, in many instances disclosures are required to show what management intends to doing in the coming future which are called management’s best estimate;

2 Liabilities:

When budgeting, you also put in place the bank loans, intercompany loans, trade lines etc. that you plan to take in the coming year. The guidelines for IAS 37, provisions, contingencies and committments lays down the criteria that can be used if you are looking for some guidance on what to put in that section.

3 Equity

If the company plans to issue new shares, either being an IPO or right or bonus shares, you can show that in your budget as projected increase in equity.

4 Income & Expenses

I guess this is clear to you that you can project based on past experience and internal departmental discussions.

I hope this helps.

Zeeshan

Hi All,

I tend to agree with Zeeshan; especially if management policy is to develope a comprehensive budget. However, some management limit the budget package to revenue & capital budgeting in the normal format/way. But it’s sometimes necessary to link these tools to a set of ”forecast financial statements” in order to depict a picture of how the entity will look in terms of result and position based on the estimates made. Therefore, it depends on the level of information management will need about the future today.

The use of forcast financial statements in the budgeting process can also help management have an easy sail in the development of its forecast cashflow and the proper management of cash, debts, liabilities, etc.

William

Dear All

I totally agree with Zeeshan, the budget components should incude the all assests, liabilities, P&L accounts and a statement of cash flows.

–
Hesham

Hi Mohammad,

Companies make budgets for Income, expenses, Assets and Liabilities. So you will have a budgeted Income statement, Balance sheet and Cashflow as well to check on the liquidity.

Thanks

Ragu

Dear Mohammad,

In budget making process, the 1st budget which we have to make is
Sales budget then based on this we have to make Purchase budget,then
Inventory, A/R & A/P, based on these Operating Expenses & Capital
Expenditure. In the last we have to make Cash Budget which is based
all of the above. Then keeping in view all of the above budgets we can
make the projected Financial Reports.

Regards,
Hameed

I do not recall any specific provisions as regards Budgets or Budgeting process in terms of IAS/IFRS.

Budget is basically a control mechanism and can be used for all sorts of activities involving quantitative or/and financial impact, as far as your query is concerned in specific terms, Mohd. Aamir Jawad worded the solution appropriately.

Regards

dear mohmad
i do not think that under IFRS/IAS have any provition related to the budget the reason behind is that the IFRS/IAS is for the harmonijation of the accounting policy but the budget is the internal matter of the company and it is wholy all depend on the company that how is company praparing there budget?

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IAS 2

ifrslist — Sun, 14 Dec 2008 22:24:00 +0000

Dear all,

Is it fair to value inventory at updated standard costs even if the inventory item was manufactured at a time when standard costs were much lower?

Regards,

Grace

Hi Divine

I experienced this issue in 1995

It is fair and possible but all depends on the control and policies you have

IAS 2 allows you to use standard cost valuation for inventory in final reporting if standards approximate to actuals. As you well say below the standards will always differ a lot to actuals particularly now (and so was the case in 1995) because of fluctuations between the USD and the Euro (i.e. standards will have been built at the budget rate in say October 2007 latest and obviously the budget rate has nothing to do now with the spot rate USD/Euro)

The solution is therefore

a) restatement to actuals when the variances are so big
b) clear definition of what to do with exchange rate variances. This is critical if you use forward contracts to cover purchases in USD then NOT all can be booked as unrealised exchange gain in the financial result, there should be a correlation between goods purchased forward contracts, this is critical and then

1. the exchange rate difference between spot rate at the time the goods enter the warehouse and the forward contract rate should be the one used to value inventory i.e. more or less COGS

2. the exchange rate difference between spot rate at the time of payment and the forward contract rate is indeed a financial gain or loss

Hope this helps

Dear,
Thanks a lot that you keep us updated and share with us valuable pieces of information.

It is requested plz guide about standard on FINANCIAL INSTRUMENTS, Its accounting treatment,disclosure and recognition.
Plz mail updated and in an easy way.
Again thanx a lot

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Inventory Report

ifrslist — Sun, 14 Dec 2008 22:21:00 +0000

Hi…

I will really appreciate if someone can tell me the format of writing
inventory auditing report.

Thank u very much,
Ibn

Hi Please give some more information regarding what you need

Hi.. thanx. Recently i have taken physical stock at out warehouse n
have noticed some discrepencies. i wanna repot it. i want to know the
format of writing such reports. is there any standard format?

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Capitalization of WIP

admin — Sun, 14 Dec 2008 18:44:00 +0000

Hello,

If a company asks a third party to construct a fixed asset and at the end of the year, the fixed asset is not complete, but you have a statement of the costs incurred, would you capitalize the costs incurred under Construction in Progress with counterpart in accruals. Or would you record an entry only when it has been delivered to the company?

What IFRS would be applicable?

Thanks,

Isabelle

IFRS 16 would be applicable “Plant , Property and Equipemnt”

Recognisation -

Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16.7]

the future economic benefits associated with the asset will flow to the enterprise; and
the cost of the asset can be measured reliably.

Trust this clarifies your doubt.

cheers

Piyush

It appears to be a fit case for off balance sheet item and accordingly IFRS related to OBS comes in picture.

Regards

CMA Ashutosh

It should not be off balance sheet item, since both the criterion for capitalisation of an assets as mentioned in IAS 16( clause 16.7) are present in this case.

Please clarify what is ‘ IFRS related to OBS’

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Hello

We are a telecommunications company providing a mobile network and it is common to have huge Work in Progress on the Balance sheet over year end. Important though to establish contract in order for reward and risk to pass with the supplier or third party. Have a look at IAS 16 for PP&E.

Regards

Vivianne

IAS16 applicable for fixed assets in which ownership has passed on BUT here the case is different and ownership does not pass on until the site is completely handed over to the company. Ofcourse matter is to be decided with reference to the T&C entered into or agreed with Third party.

What I feel it would be appropriate to disclose the actual position by way of an appropriate NOTE to the Balance Sheet of the Company.

Regards

The relevant protion of IAS16 is reproduced below:

Property, plant and equipment

are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to

others, or for administrative purposes; and

(b) are expected to be used during more than one period.

The cost of an item of property, plant and equipment shall be recognised as an asset if,

and only if:

(a) it is probable that future economic benefits associated with the item will flow to

the entity; and

(b) the cost of the item can be measured reliably.

COMMENTS:

The word is ‘held’ which construed the possession of fixed assets in the hands of company or legally speaking the transfer of ownership. In the instant case neither the asset in question is in the possession of company nor the ownership in it has transferred to the company hence how it can be regarded as fixed asset at the moment, please clarify.

Thanks for all the comments.

i would look at it the other way round, i.e. do i have to record a liability in my books and thus record an asset under Work in Progress.

At year-end, when I get the statement saying how much of the project has been completed, I have a binding obligation through the contract that was signed and thus should record a liability for the work completed up till year-end. The counterpart of this liability would be fixed asset/ Work in Progress.

Does this make sense?

What journal entry is suggested then, to record the payments made to the supplier? Just curious.

The conclusion drawn appears sound.

Regards

CMA Ashutosh

Does the contract state that you pay in instalments ? If so I feel you need to recognize asset proportion to the amount you have paid for work already done.if nothing has been paid towards the contract then a note will be sufficient as stated by Ashutosh.

Yes, down payments to cover the period of installation and WIP capitalization takes place on the bits received in equipment and services delivered. We are replacing our Core network as we speak over a period of 84 days. It is also our year end 30 September. Some of the equipment is still under the control of the Supplier (by agreement) as that specific phase will only be implemented around March 2009 and for that we don’t disclose anything as it is not our property yet.

When we concluded the deal with the Supplier, we used DDU and took ownership of the equipment on delivery, hence IAS 16 applies.

regards

Dear Vivianne,

Though I cant specifically quote an accounting standard, I feel you need to disclose by way of a note to your Financial statements ending 30t September 2008 ( under management commentary) with regard to equipment still with your suppliers.the information may be important to your stakeholder ( especially shareholders) who may want to know how there funds will be used in the near future.

Does this makes sense?

i am not yet an expert in financial statements but a student and so am just trying to see if my contributions can make sense.

In fact my view primarily co-relates the sequence of events and therefore, accounting treatment would follow the same preposition:

Step1: Create the liability in your books for the payment due against the work completed,

Step2: Account for the WIP as an asset, the completed portion

Step3: Put down a NOTE in the Balance Sheet disclosing full contractual value and time limit estimated for completion with the coningency or other related factors as per T&C agreed with.

Now the question of payment made or not made may accordingly be dealt with by simply passing the entries thru Vendor account.

What we do, based on the fact that we take ownership of the Equipment:

Dt CWIP (Asset) and Ct Supplier (liability) or in the case of Inventory Spares, Dt Inventory and Ct Supplier – sometimes, depending the case, the Equipment is held as Inventory iso CWIP.

Once final Commercial Acceptance is taken, we Ct CWIP and Dt Fixed Asset and start with Deprec – obviously by then the Supplier was paid.

Regards

Yes a note makes perfectly sense, under the Post Balance Sheet review (subsequent events) in the report of the directors, in our case. Even though we are a registered Limited company, we are non listed and then Financial Statement disclosures are not that stringent (or at least in my experience).

Regards

PS I think this is an excellent way of sharing international experience and subject knowledge! Thanks to the site and everybody sharing!

After all these emails, I have come to the following conclusion.

Under IFRS, a Company can record a Work in Progress with a corresponding liability at a period-end, if the following conditions are met:

1) there is an irrevocable agreement between the Company and the supplier

2) it is possible to measure the work done (i.e. a reliable estimate is possible)

3) it is clear that the item under construction at the supplier’s site belongs to the company (i.e. risks and rewards are borne by the COmpany).

The items above are a combination of IAS 16 and IAS 37.

Hi all,

I would believe you will need to disclose in the Financial statements as:

Capital commitments

Capital expenditure in respect of purchase of PPE – approved and contracted for.

Regards,

Sylvia

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Fixed vs Variable Wage Expense

ifrslist — Thu, 28 Aug 2008 15:29:00 +0000

Hello all,
Our company is operating in aircraft maintenance, repair and overhaul (MRO) sector. Wages are paid to the direct&indirect blue collar employees on monthly basis, regardless of how much man/hour spent. But overtime is paid for the excess time charged.
Regarding the classification of wages paid to the blue collar as fixed and variable, what do you think the classification will be? Should we assume that these wages are related with the level of production, and totally assumed as variable, although the payment is fixed on monthly basis; or only the overtime paid is variable and the rest is fixed?
Regards,
Ali

This is rather management accounting question.

I would go for reporting it all as fixed including overtime.
The variable should vary with the level of output (production).
This is not the case in your operations.

Regards,
Jakub

Look at the text of IAS 2 Inventories:Costs of Conversion

12. The costs of conversion of inventories include costs directly elated to the units of production, such as direct labour. They also nclude a systematic allocation of fixed and variable production overheads hat are incurred in converting materials into finished goods. Fixed roduction overheads are those indirect costs of production that remain elatively 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.

The production volume will be rather stable but it can still vary with actual usage (i.e. when busy less non-productive time and meetings/courses etc, all labor cost are therefore variable cost.

Kind regards,

Henk

Dear all,

Please note that:

Whether the wages are direct or indirect it could have a fixed and variable portion (i.e.whithin the relavant range of activity there will be no need for wages per production so it is all fixed)

While if extra hours(over time) were needed that means the basis of payment became linked to hour usage (PER hour) wages only will be treated as variable while the fixed monthly amout of wages will remain fixed as it used to be.

So I disagree with other couleagues who mentioned that according to IFRS all wages will become variable.

Please contact me for any help, i have joined your discussions few days back only

Best regards

I would like to support Mohammed view.

As mentioned before in my previous mail in this case a

ll wages (including overtime) are fixed.

Regards,

Jakub

Dear Sirs,

here i would to like add some comments that WAGES are always paid to direct labour, whether fixed or variable, therefore wages are considered as variable. . . plz dont be confused with the term “WAGES”. With reference to cost accounting “direct material” & “direct labour” are always considered as variable, whether fixed or variable.

need your valued comments nad plz correct if i m wrong.

regards,

Ammad

Dear ammad,

Could you pls. tell me the reason you mentioned the WAGES as variable expenses while it is not connected directly to the production process?

Cost accounting treats variable expenses as changing directly with the level of production?

Dear Abdel-Hadi,

the term WAGES is related to only and only direct labour; direct labour is never paid salaries. the term salary is connected with indirect labour e.g. supervisor, peon/sweeper for production.

while using marginal/variable costing for decision making purposes, direct material & direct labour are considered as variable costs always. . .

regards,

Ammad

Variable is not 100% variable with every varation in the production utilization level, variable is about whether a company is able (whether it does is something different) to adjust their labor force to adjust to an longer change in the production utiulisation level (increase = employ more people, decrease = dismiss people after certain procedures have been met (i.e. regulatory/governmental standards)).

Kind regards,

Henk

I would like to add something that it is an order based service organization (where job costing is implemented by considering cost centers & specefic specialized job). you are just considering production oriented organization.

plz clear your understanding. . . .

rgrds,

Ammad

Our case – if we refer to the original text is the company is paying montly wages(direct&indirect)

so the point is not whether the company called it WAGES or salary, the point is the there is a wage paid on monthly basis- linked to period-not to production level.

So please refer back to the first e mail and my first reply to the e mail in order to reach a coordinated solution and whether the company mistakenly called it WAGES or they really consider it wages that will not affect the cost accounting classification of it remembering that the fixed expenses is changing also by the reduction and increase in the level of capacity while variable expenses is 100% variable in terms of production changes and variations.

GAAP defines variable expenses as constant per unit while changing in total.

Here is another point that constant per unit doesn’t mean that it is partially fixed, so by the production line moving up and down also fixed will change per unit and variable might also change per unit , at the end fixed will remain fixed 100% and variable will stay variable absolutely 100%.

Regards

Abdul Hadi

Dear mr. Abdul-Hadi,

plz be practical & have pprofessional approach, what are your comments regarding service organization. . .???? its a case of management/cost accounting.

In ths case, job costing is implemented and wages are charged to job/cost center, that become variable on the basis of labour hours.

sir, just forget the level of production to sort out the case. In service sector, employees are not paid wages but salaries, either direct labour or indirect labour, & their salaries are charged to the specific department/cost center. am i right . . . . .?? & for decision making purposes their salaries are considered as direct & on that basis accounted for as varible, used for decision making purposes.

regards,

Ammad

I think you are taking things to black and white. Calling something wages or salary may be dependent on culture, business or history, it does not say anything about applying IFRS. You jave to look at the facts in this company and whether they make a proper and clear decision on fixed and variable. And then still it remains, variable is not about 100% variable with every production unit variance, then everything would be fixed ’cause nothing is that flexible.

Henk

Ok, then it is even more simple, it is all about writing service time spend to orders, the hourly rate has to be based on ‘normal’ service hours and ‘normal’ wages.

Kind regards,

Henk

Dear all

We are talking about international standards for reporting then how can we use variable cost method which is not GAAP, not IRS and not IFRS.

Normal hours! Normal wages!

That is for management control system which is not the case presented at all.

Normal costing method -s used to allocated overhead costs as follows:

Budgeted total cost/budgeted cost driver*actual hours used.

That is not our case because normal cost is used when the problems in actual cost are :

1-Timeliness of information (the actual cost for direct labor are readily available but the actual costs for overhead can take some time to gather.-that is not in our case here-

2-Less fluctuations in costs from period to period, and that is to avoid some of the problems in pricing and performance evaluations that exist with actual cosst.- Not at all related to the case

Please note that standard , normal and actual costs are not linked to the case above at all.

Instead of that we have to do the following:

Actual monthly costs /actual work done(whether job orders finished or hours spent)

It is a simple straight- none manufacturing-method for allocation

while it is fixed operating salaries paid for the financial reporting information.

Kind regards

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IAS 2 Inventories

ifrslist — Thu, 28 Aug 2008 15:28:00 +0000

Can anyone help me to understand the IFRS – IAS 2 -

1. Inventory – wrtie-down and write-up of inventory cost??
2. IAS 2 – Does this apply to work-in-process??

Thanks for your assistance.

Ray

Ray,

1. You should write down inventory to NRV (net reasliable value) or when
the stock became obsolete. You can increase the value of inventory when
you measure your stock at standard cost/retail method and the standard
change.

2. The IAS2 applies also to WIP, however under specific circustances you
don’t have to value WIP at all.

Regards,
Jakub

This topic was already discussed

Background:Back in 1995 when we floated a Europepan consumer goods company we moved from German GAAP to IAS. One of the challenges was that under German GAAP the inventory valuation was weighted average cost whereas the CFO imposed (quite correctly despite internal views arguing that standard costing was for industrial companies only) standard costing not only in the management accounts reports (i.e. COGS) but also in the inventory balance sheet valuation.

In the absence of Corporate Manuals we (audit) had to write the standard costing guidelines. Our framework at the time was IAS 2 which allowed for it in financial reporting provided it approximated to actual cost. And here was out challenge, as standards had a budget exchange rate and our purchases of goods (all production was outsourced) were covered 80% at forward contract rates, the “bad” budget rate planning caused numerous variances which led to continous restatement of standards to approximate to actuals. In as much our production was outsourced for us capitalization of overheads was out of the question as this was already built into the FOB standard cost charged to us by the outsourced company. Our task was to tackle the restatement and establish reporting guidelines for price variances (reported above the line) and financial variances between forward rates and rates at the date of payment to report them below the line.

However now I need to deal with an industrial company which has its own plants, where standard costing exists but IFRS is “new” to controllers. I have 3 specific questions:

1. Has IFRS said anything else on standard costing in financial reporting other than what IAS 2 said?

2. Does IFRS say anything about capitalization of overheads for standard costing?

3. What examples can you give me about capitalization of overheads in standard costing ?(i.e. I can understand plant overheads but where do we draw the line? because in other places I have seen a portion being allocated only)

Not an easy topic (because in my experience in Europe you find differences in standard costing all over the place depending on IT issues, Corporate Manual issues, as well as management account issues to identify the variances), your anwers will be much appreciated. Please be creative with your examples

Thanks in advance

Kind regards

Jorge

However now I need to deal with an industrial company which has its own plants, where standard costing exists but IFRS is “new” to controllers. I have 3 specific questions:

1. Has IFRS said anything else on standard costing in financial reporting other than what IAS 2 said? No

2. Does IFRS say anything about capitalization of overheads for standard costing? No

3. What examples can you give me about capitalization of overheads in standard costing ?(i.e. I can understand plant overheads but where do we draw the line? because in other places I have seen a portion being allocated only)

This is from the standard

Other Costs

15. 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.

16. 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 before a further production stage;

(d) selling costs.

17. FRS 23 Borrowing Costs identifies limited circumstances where borrowing costs are included in the cost of inventories.

Thanks in advance

Kind regards

Jorge

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NRV

ifrslist — Thu, 28 Aug 2008 15:26:00 +0000

Hi all,

Need your help on this. I am trying to look into my Inventory valuation in my Accounting system hence if you have any suggestions pls do reply me.

Currently we are using Navision system and if any of you are using the same system it will be good if I can hear your feedback because I am trying to get my vendor to do NRV valuation for my Inventory and they give me negative answers.

In addition we are using FIFO method but in the system it doesn’t calculate it this way. But my vendor tells me this is the way it is. Any good websites which can help will be helpful

Regards,

Sylvia

Hello Sylvia,

The temporaty solution for you could be to calculate NRV values outside the system.

The difference between NRV and orginal stock just post to your books.

Create new general ledger B/S (eg. stock provision NRV) and P&L (eg. NRV valuation loss) accounts and downgrade the stock values with lumpsum (dt P&L, cr B/S)

Regards,

Jakub

Hi,

Thanks for your advise.

I cannot depend on that soon as I need to check every item of my stocks to determine my NRV and its really a lot of work and inefficient.

Really do need an expert who can tell me something about Navision / who is currently using this system.

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Valuation of Inventory according to re – denominated currency

ifrslist — Thu, 28 Aug 2008 15:21:00 +0000

Dear All Recently our currency in Zimbabwe was re-denominated by 10 000 000 000 factor, prior to this we imported stocks and converted them at prevailing stipulated rates as at that period. After the re denomination we have stocks at 0 value. According to standards is it possible to re value stocks so that we will be able to reflect true inventory valuation and cost of sales.

I appreciate your assistance

Regards

Dear Brighton

As the economy in Zimbabwe has gone hyperinflationary it seem logical to follow IAS 29 Financial Reporting in hyperinflationary economies.

Inventory should be revalued to its present market value or inflation adjusted cost.

thanks

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Inventory Write-Down

ifrslist — Thu, 28 Aug 2008 15:13:00 +0000

Hi Antonello

I hope you can answer some of my questions related to IFRS – inventory write-down.

Case:

Inventory unit cost was $ 15.00 purchase price

Sales price for $35.00 per unit

Total unit at year-end – on hand quantity 1000 units

Forecast 100% stocks classified as non-salesable.

Reserve set up at the end of year was $ 15,000.00

Third party disposition for 1000 units – sales price drop to $10.00 per unit – $10,000.00

What is the accounting treatment for the above transaction under IFRS?

Your input is much appreciated.

Thanks,

Raymond

A loan can be classified as available for sale in accordance with IAS 39.

A typical example is a syndicated loan where the arranger intends to sell part of (or the full ) amount lent to other counterparties.

The loan shall be accounted for at fair value less any impairment loss.

Antonello

Hello all,

I think you should first reverse the impairment for 5000. And then recognise the sale for 10 000 together with the cost of sales of 10 000.

Regards,

Veronique

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IAS 2 INVENTORIES – NET REALIZABLE VALUE AND WRITE-OFF

ifrslist — Thu, 28 Aug 2008 15:07:00 +0000

Hi: Good morning: Henk:

Would you be kind to let me know the IFRS – IAS 2 concerning to ret realizable value and write-off: 1. How to handle the declined value of inventory stocks? 2. What is the correct procedure to write-down of damaged or obsolete items?

Thanks for your assistance.

Raymond

The easy way would be that the outcome using a flat rate does not materially differ from using the (IFRS correct) effective rate. Otherwise the accounting needs to either

- keep a separate ledger to account for income using an effective rate (for example a spreadsheet) and adjust it for financial statement purposes, or

- calculate the difference between flat rate and an effective (average) rate for a period (month, quarter or year, the shorter the more real) and adjust the income amount.

Kind regards,

If an institution is recognizing income by using flat rate method, but IFRS requires to recognize by using effective rate method. My questions are:

a) policy remains but financial statements it should be based on effective rate. Is it?

asim

I don’t think so, see this link

http://en.wikipedia.org/wiki/IFRS

Hello:

Can anyone confirm if the PRC has officially transitioned to full IFRS GAAP reporting and if so, what was the effective date? Are companies mandated to report in IFRS GAAP or can they still report in PRC GAAP up to a certain point?

Thanks for any clarification any of you can provide.

Also, if you have any resources you might refer me to, that would be great.

Debbie

As per IAS 2 :

Inventory to be valued at Lower of cost or Net relizable value NRV. NRV= Selling price minus estimited cost to sell.

Any decline is to be charged to cost of good sold.

In GAAP

Inventory to be valued at Lower of cost or Net relizable value NRV

But the MArket value is the median of Rreplacement cost , Ceiling (SP-cost of completion and selling) and Floor ( cost of completion and selling and profit).

Any decline is to be charged to cost of good sold.

Shabi

b) How to convert portfolio by using effective rate.?

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Difference b/w "Current Cost" & "Replacement Cost"

ifrslist — Thu, 28 Aug 2008 15:06:00 +0000

Dear Moderators,

I need the difference b/w “Current Cost” & “Replacement Cost” as per IAS/IFRS. Plz elaborate with examples. . . .

thanx & b/rgrds,

ammad

no difference.

–
best regards,
Tope

Current Cost

- Current cost is the cost that would be

incurred at the present time to replace an asset, the

replacement cost or the lower recoverable amount. See

also historical cost and nominal dollars and constant

dollars.

FIFO Method

- Under FIFO, the first costs inventoried

are the first costs transferred to cost of goods sold.

Ending inventory includes the most recently incurred

costs; thus, the ending inventory balance approximates

replacement cost. In periods of rising prices, income

may be overstated because the FIFO method results in

the highest ending inventory, the lowest costs of goods

sold, and the highest net income (current costs are not

matched with current revenues). See also specific

identification method and weighted average method and

moving average method and LIFO method.

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Cash/tax

ifrslist — Thu, 28 Aug 2008 14:39:00 +0000

Hi all!

Can you tell me the journal entry of this prblem…

Goods sold Rs.10000
Discount on cash payment 5%
Add tax 4%

Plz journalize it!

Sales                    10.000 Credit
Sales discounts          500 Debit
Tax payable               380 Credit
Cash                      9.880 Debit

Is this IFRS related? Or is this an accounting course exercise?

Cagri Gurses wrote:

Agree with the below. However, not sure if he means 4% tax on the 10k or
inclusive in the 10 k. If over and above, then theJEs could look like this
as shown below (broken down for easy understamding). I dont think if it is
inclusive in the 10k that the sales amount should reflect the gross of tax
included amount.

Discount Allowed 500
Cash/Bank 9,500
To Sales (10,000) (Also, do not forget to include the
measures of unit to be credited from inventory, if doing computerized JE)
(To record Cash Sales)

Cash/Bank 400
To Taxes Payable (400)
(To record taxes owed on sales)

Taxes Payble (Remit) 400
To Cash/Bank (400)
(To record tax remittance)

Hope this helps.

Shibaji

Ur required entry is

Party Ac 9917

Discount 500

Sale 10000

Tax payable 417

I would like to know whether Fund Managers consolidate their mutual funds in their balance sheet even if the holding of fund manager is not significant in the funds say 10%.

Further I would also like to know whether banks who have holding in Funds manager are required to consolidate mutual funds as they have indirect holding in the fund.

Regards,

Shahid

No, based on investment guidelines under US GAAP (industry guidelines) the Fund Manager will not consolidate the investment fund,

Kind regards,

Henk

Sales Cr 10000
tax Cr 400
Cash a/c 9900
Discount 500

From where I can download investment guidelines under US GAAP referred to by
Madan Mohan?

Sales                   Dr 10,000
Sales discounts      Dr    500
Tax payable             Cr  380
Cash                      Dr 9,880

–
Best Regards,
Ravi

Kindly determine first if the Sales of 10,000 is inclusive or exlusive of the 4% tax.

However, the JE should be:

Cash (amount of cash received) xxx

Sales Discount (5%) xxx

Sales(exclusive of tax) xxx

Tax Payable(4%) xxx

Sales 10.000 Credit

I have not found all the guidelines (they are scattered around many
standards, there is a standard booklet summarizing all of it, look at
AICPA.com (they have a shop to buy the book, it ha ‘Investment Companies’ in
the name) or amazon.com) but here is a nice comparison between IFRS, US
GAAP and Canadian GAAP, see the section consolidation model, use this link

http://www.pwc.com/extweb/pwcpublications.nsf/docid/CFF01AF62A27FAFD85257376
005E42D0

Hope this helps,

Henk

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Recognition of Transfer Pricing charges

ifrslist — Thu, 28 Aug 2008 14:38:00 +0000

Quik question for the group.

How would you record transfer pricing charges to a foreign subsidiary above the profit line in the P&L? Specifically, if the TP charge is US$ 1.0MM – I understand the parent side would be an entry to a revenue account; however, the question is how to record it on the subsidiaries books (i) as a Cost of Sale or (ii) as a contra revenue?

I am treating it as revenue to the parent and COGS to the sub – looking for arguments that it should be treated as a contra on the sub’s books. It comes down to whether we want to see an increase in revenue along with a corresponding increase in COGS on the consolidated financial statements or do we want it to eliminate it during the consolidation process as would happen if we chose the contra method – obviously, profit remains unchanged. Thoughts?

Sonny

In the separate financial statements of each entity it is revenue for the selling entity and cost of ssales for the purchasing party. But only when the goods or service has been sold by the purchasing party (otherwise it would be revenue to the selling aprty and inventory to the purchasing party). On consolidation all intercompany transactions are eliminated. Items in inventory purchased from a entity part of the consolidation has to valued at cost to the group, that is the profit the selling party has recorded in its separate company accounts has to be eliminated. What remains is turnover to parties outside the group of companies consolidated and cost of sales from third parties and own production people.

Hope this helps,

Henk

From my consumer goods industry experience it is indeed COGS assuming for our purposes that it is a transfer of an inventory which is the core product that the Group sells as opposed to a transfer of say a “technological asset”

It does – thanks.

Sonny

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IAS 2

ifrslist — Wed, 27 Aug 2008 20:52:00 +0000

Dear All

can some one explain the Para 19 of IAS 2.I want an example of the inventory held by a service provider.

Thanks and regards

–
Kamran

Inventories held by service providers are those which will be used incourse of providing services like an Electrician may provide serviceto his clients and can use some switches, wires etc.

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