Firm sales contracts and materials held for production

Learning objectives

• Determine the net realisable value of inventories held to satisfy firm sales contracts on the basis of the contract price, the excess being measured at general selling prices, and identify the reference to IAS 37 for onerous contracts.L2, L3
• Assess whether raw materials should be written down: no write-down if the finished products in which they will be incorporated are expected to be sold at or above cost; otherwise, replacement cost may be the best available measure.L3, L4

Normative references

• IAS 2 §31Estimates of net realisable value also take into consideration the purpose for which the inventory is held. For the quantity held to satisfy firm sales or service contracts, net realisable value is based on the contract price; if the contracts are for less than the inventory quantities held, the excess is based on general selling prices. Provisions may arise from firm sales contracts in excess of inventory quantities held or from firm purchase contracts, and are dealt with under IAS 37.
• IAS 2 §32Materials and other supplies held for use in production are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when a decline in the price of materials indicates that the cost of the finished products exceeds net realisable value, the materials are written down; replacement cost may then be the best available measure of their net realisable value.

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

8 questions

• Ternoval has signed firm sales contracts covering a quantity of wood pellets greater than the quantity it holds in inventory. True or false: any provision needed for the contractual quantity in excess of the inventories held is determined under the net realisable value rules of IAS 2.L2
• The trader Ardelle holds 800 tonnes of soybean meal. It has entered into a firm sales contract covering 500 tonnes at a fixed price. On what basis is the net realisable value of the 300 tonnes not covered by this contract estimated?L2
• At the year-end, Kalvéra holds {units_held} dosing pumps with a unit cost of {unit_cost}. It has entered into a firm sales contract for {contract_units} pumps at a unit price of {contract_price}. The remaining pumps will be sold at the general selling price, estimated at {general_price} per unit. Costs necessary to make the sale are estimated at {costs_to_sell} per pump for all sales (case data). Compute the write-down to recognise and the carrying amount of the pumps after the write-down.L3
• Caves Dorvalle holds {units_held} bottles of the same vintage, with a unit cost of {unit_cost}. To sell part of the lot, it has signed a firm sales contract with a restaurant owner for {contract_units} bottles at a unit price of {contract_price}. The rest of the lot sells at the current price of {general_price} per bottle. Estimated costs necessary to make the sale amount to {costs_to_sell} per bottle (case data). Determine the write-down of the lot and its carrying amount at the year-end.L3
• Ferlune manufactures cast-iron radiators. At the year-end, the market price of the pig iron it holds in inventory has fallen. Select the correct statements on the measurement of this inventory of materials.L3
• Atelier Norvane manufactures city bikes and racing frames. At the year-end, it holds two raw materials. Aluminium (cost €60,000, replacement cost €52,000) is used in the city bikes, whose expected unit cost is €400 for a net realisable value of €520. Carbon fibre (cost €90,000, replacement cost €75,000) is used in the racing frames, whose expected unit cost is €1,300 for a net realisable value of €1,150; the carbon fibre inventory is sufficient for 100 frames. For carbon fibre, management considers replacement cost to be the best available measure of its net realisable value. Which conclusion should be reached?L4
• Fonderie Brésal holds {quantity} kg of an alloy purchased at a cost of {unit_cost} per kg. At the year-end, the price of the alloy has collapsed: its replacement cost is {replacement_cost} per kg. Each casting uses {kg_per_casting} kg of alloy. The castings made from this alloy have an expected production cost of {finished_cost} per casting, for an estimated net realisable value of {finished_nrv} per casting. Management considers, as a documented judgement, that replacement cost is the best available measure of the net realisable value of the alloy. Compute the write-down of the alloy and its carrying amount.L4
• The chocolate maker Cacaoria has built up an inventory of {quantity} kg of cocoa beans, paid {unit_cost} per kg. An exceptional harvest drives prices down: at the year-end, these beans could be bought back at {replacement_cost} per kg. The fall in cocoa prices passes through to the selling prices of gift boxes: the expected cost of a box, which uses {kg_per_box} kg of beans, is {finished_cost} while its net realisable value is now only {finished_nrv}. After analysis, management retains replacement cost as the best available measure of the net realisable value of the beans. What write-down should be recognised on the beans, and at what carrying amount?L4