Inventories, net realisable value and fair value

Learning objectives

• Identify what constitutes inventories: assets held for sale in the ordinary course of business, in the process of production for such sale, or materials and supplies to be consumed in the production process or in the rendering of services.L1
• Distinguish net realisable value, an entity-specific value, from fair value less costs to sell, which may differ from it.L1, L2

Normative references

• IAS 2 §6Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services. Net realisable value is 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. Fair value is defined by reference to IFRS 13 (exit price between market participants at the measurement date).
• IAS 2Net realisable value refers to the net amount that an entity itself expects to realise from the sale of inventory in the ordinary course of business; fair value reflects the price of an orderly transaction between market participants in the principal (or most advantageous) market. The former is an entity-specific value; the latter is not, so net realisable value may differ from fair value less costs to sell.
• IAS 2Inventories include goods purchased and held for resale (merchandise purchased by a retailer, land and other property held for resale), finished goods and work in progress being produced by the entity, and materials and supplies awaiting use. Costs incurred to fulfil a contract with a customer that do not give rise to inventories (or to assets within the scope of another Standard) are accounted for in accordance with IFRS 15.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

27 questions

• Which of these assets falls entirely within the scope of IAS 2?L1
• The Clos-Varenne estate farms its vines, harvests the grapes and turns them into wine, which it sells. Consider three items: the vines, the grapes at the point of harvest and the wine maturing in vats. Which allocation is correct?L2
• Raw materials that a bicycle manufacturer holds to be consumed in its production are inventories under IAS 2.L1
• Tornalis may classify as inventory a hydraulic press it has used in its workshops for several years, on the grounds that the press is used in production.L1
• The net realisable value of an inventory item is always equal to its fair value less costs to sell.L2
• To obtain net realisable value, an entity starts from the selling price it expects in the ordinary course of business and deducts the costs it still expects to incur to complete the item and to sell it.L1
• Land that a property developer holds for resale as part of its business is inventory.L1
• How does IAS 2 define net realisable value?L1
• Distrimax, a distributor of electrical equipment, holds the following assets. Which one is not inventory?L1
• Why can the net realisable value of an inventory item differ from its fair value less costs to sell?L2
• Which of these items meet the definition of inventories? (several answers possible)L1
• Which statements about net realisable value are correct? (several answers possible)L2
• Torréfia holds a batch of green coffee. It plans to roast it and sell the resulting coffee to its own customers at an estimated price of EUR 31,000, after estimated costs of completion of EUR 4,500 and estimated selling costs of EUR 1,500. In the principal market for green coffee, an identical batch would be exchanged between market participants at EUR 22,800, with costs to sell of EUR 800. What is the net realisable value of the batch for Torréfia?L2
• Logivia performs consulting engagements. To fulfil a contract with a customer, it incurs staff and travel costs; no goods are produced and no asset within the scope of another standard arises. The management controller proposes to recognise these costs as inventories under IAS 2. What should be the answer?L2
• Netéclat provides industrial cleaning services. It holds detergents to be consumed during its jobs at customers' premises. How should these products be characterised under IAS 2?L1
• Vitralis is manufacturing a glass roof whose cost incurred at the reporting date amounts to EUR 1,200. Once completed, it can be sold for EUR 1,300; the remaining costs of completion are estimated at EUR 150 and the selling costs at EUR 50. At what amount is this glass roof in progress measured at the reporting date?L2
• Menuisor makes custom staircases. At the reporting date, a staircase in progress has a cost incurred of {cost}. Once completed, it will be sold for {selling_price}; the estimated costs of completion amount to {completion_costs} and the estimated selling costs to {selling_costs}. Compute the net realisable value of the staircase and the amount at which it is measured in inventories.L2
• The Sylvebois workshop is finishing a solid oak table intended for sale in its showroom. The accumulated cost of the table is {cost}. Its expected selling price is {selling_price}. Finishing costs of {completion_costs} (varnish and labour) remain to be incurred, and the sales agent will earn a commission of {selling_costs} on the sale. Determine the net realisable value and the amount of the table in inventories.L2
• The Cyclarde shop bought an electric bicycle for {cost}. At the reporting date, it expects to sell it for {selling_price}, with delivery and the salesperson's commission amounting to {selling_costs}. No costs of completion are expected. Compute the net realisable value of the bicycle and its amount in inventories.L1
• Domélec, a distributor of household appliances, holds three unrelated lots of goods at the reporting date; according to the facts of the case, no grouping is appropriate. Lot R: cost {cost_r}, estimated selling price {price_r}, estimated selling costs {sell_r}. Lot S: cost {cost_s}, estimated selling price {price_s}, estimated selling costs {sell_s}. Lot T: cost {cost_t}, estimated selling price {price_t}, estimated selling costs {sell_t}. No costs of completion are to be incurred. Compute the total amount of inventories at the reporting date and the total write-down.L3
• The Aérotech group manufactures cabin equipment. At the reporting date, it holds a passenger seat in progress and a completed cabin panel, two separate items that the facts of the case do not allow to be grouped. Seat in progress: cost incurred {cost_w}, estimated selling price once completed {price_w}, estimated costs of completion {completion_w}, estimated selling costs {sell_w}. Completed panel: cost {cost_f}, estimated selling price {price_f}, estimated selling costs {sell_f}. What is the total amount of these inventories in the statement of financial position, and what write-down must be recognised?L3
• The wholesaler Rouelibre holds two models of city bicycles, each measured separately according to the facts of the case. Alto model: {units_a} units, unit cost {unit_cost_a}, estimated unit selling price {unit_price_a}, estimated unit selling costs {unit_sell_a}. Brio model: {units_b} units, unit cost {unit_cost_b}, estimated unit selling price {unit_price_b}, estimated unit selling costs {unit_sell_b}. Compute the total amount of the bicycles in inventories and the write-down to be recognised.L3
• Horlogerie Vasselin holds a batch of watches from a past collection, with a cost of {cost}. Their estimated selling price in the ordinary course of business is {selling_price}, and the estimated costs necessary to make the sale (resellers' commissions) amount to {selling_costs}. Calculate the net realisable value of the batch and the amount of the write-down.L1
• At the reporting date, Charpentes Valdor holds a steel frame in the course of production, on which costs of {cost_incurred} have been incurred. Once completed, it is expected to be sold for {selling_price}. Estimated costs of completion of {completion_costs} remain to be incurred, and delivery and installation at the customer's site, borne by Valdor, will cost {selling_costs}. Determine the net realisable value of the work in progress and any write-down.L2
• Atelier Brunhilde manufactures furniture. At the reporting date, its inventories comprise three distinct, unrelated products. Finished lamps: cost {lamp_cost}, estimated selling price {lamp_price}, selling costs {lamp_selling_costs}. Finished tables: cost {table_cost}, estimated selling price {table_price}, selling costs {table_selling_costs}. Sideboards in progress: cost incurred {cabinet_cost}, estimated selling price once completed {cabinet_price}, costs of completion {cabinet_completion}, selling costs {cabinet_selling_costs}. Calculate the total write-down and the total carrying amount of these inventories.L3
• At the reporting date, Cycles Arvelle holds electric bikes of a superseded model, with a cost of {bike_cost}, an estimated selling price of {bike_price} and estimated costs necessary to make the sale of {bike_selling_costs}. It also holds accessories unrelated to this model, with a cost of {accessory_cost} and a net realisable value of {accessory_nrv}. The finance director proposes recording nothing, as the unrealised gain on the accessories covers the loss on the bikes. Record the required entry.L3
• Électronique Valbrune has a reporting date of 31 December 20X1. It holds 5,000 tablets of the same model, at a unit cost of 300. At the reporting date, the list price is 360 and the costs necessary to make the sale are estimated at 20 per unit. A competitor launched a more powerful model in November 20X1, which was already weighing on demand at the reporting date. In January 20X2, before the financial statements are finalised, Valbrune sells 1,200 tablets at 290 each, and its sales team states that the rest of the batch cannot be sold above that price, with selling costs remaining at 20 per unit. On 25 February 20X2, still before the financial statements are finalised, Valbrune decides to launch a new version of its tablet, which brings the price of the old model down to 240. Write a memo determining the measurement of the batch at 31 December 20X1.L4