The concept of “inventory revaluation” means a change in the carrying amount of assets. In addition, it occurs both in the direction of increase (full appreciation) and in the direction of decrease (writedown). The grounds for revaluation are different: according to the results of the inventory, by order of the management of the enterprise and so on. Consider the basic rules of inventory revaluation.
General rules
In accounting, inventories purchased (received) or manufactured are credited to the balance sheet of the enterprise at historic cost, the rules of formation of which are prescribed in paragraph 9 of the National standard of accounting 9 (hereinafter – NAS 9) (item 8 NAS 9 “Inventory”).
From now on, inventory in accounting and reporting should be reflected at the lowest of the two estimates (item 24 of NAS 9) or:
- at historic cost, ie the actual cost formed during the acquisition or receipt of inventories;
- at net realizable value, ie at the expected selling price of inventories in the ordinary course of business less the expected costs of completion and disposal (item 4 of NAS 9). Expected costs usually include: the cost of completing the production cycle, packaging, storage, delivery to the buyer and so on.
The cost of sales is determined for each unit of inventory by deducting from the expected selling price the expected costs of completion of production and sales (item 26 of NAS 9).
You can clearly see the procedure for determining the net realizable value of inventories by looking at Annex 2 to the Methodological Recommendations for Inventory Accounting, approved by the Order of the Ministry of Finance No. 2 of January 10, 2007 (hereinafter – Methodological Recommendations No. 2), which provides an example of determining the net realizable value .
The inventories are stated at net realizable value if one of the events occurred at the balance sheet date (item 25 of NAS 9):
- the inventories price decreased;
- the inventories deteriorated;
- the inventories are obsolete or otherwise lose their original expected economic benefits.
If such events have not occurred, you should not worry about inventory revaluation. The enterprise must account for inventories at the cost shown on the balance sheet. As soon as one of the events mentioned above occurs, the company must take action. It should compare the historic cost of inventories at which they were credited to the balance sheet on receipt with the net realizable value of those inventories.
If the comparison shows that the historic cost of inventories, at which they are accounted for on the balance sheet, exceeds the net realizable value of such inventories, they should be depreciated.
If the comparison shows that the historic cost of inventories is less than the net realizable value, no action should be taken. Inventories continue to be carried at historic cost.
The company will increase the value of inventories only if it has already discounted a certain type of inventories, which is still on the balance sheet of the company. In addition, the increase of value may be carried out only in the amount of the previously performed writedown (item 28 of NAS 9). That is, in fact, such a procedure is hardly an increase in value. Rather, it will be a procedure to restore the historic cost of inventories to the amount of the previously performed writedown (letter of the Ministry of Finance No. 31-34010-10/23-4902/2/4555 dated August 31, 2010). Such transactions are extremely rare, so we will talk about the depreciation of inventories.
The rules of revaluation (writedown) apply to all types of inventories, ie goods, finished products, as well as raw materials and supplies, including low value items intended for use in production (item 6 of NAS 9).
Forming a writedown
In order for the enterprise to reevaluate (writedown) inventories, it should be properly executed. In practice, the procedure of inventory writedown is carried out in the following sequence.
1. The head of the enterprise approves the order by which:
- a decision is made on the periodicity of inspections in order to establish the real value of inventories;
- a commission is approved, which will determine the net realizable value of inventories and decide on the revaluation (writedown) of inventories. The commission can be approved by a separate order of the head. Such a commission usually includes a deputy head, chief accountant, commodity expert, economist and other competent specialists of the enterprise. It is not necessary to involve third-party experts, in particular certified specialists (letter of the Ministry of Economy No. 91-22/65 dated February 26, 2008). If desired, the head can turn to them for advice.
2. The established commission makes lists of inventories that need to be depreciated. These lists are submitted to the head of the enterprise for decision. If the decision is made, proceed to the next stage
3. The commission determines the size of the writedown of goods, indicates it in the act of writedown and submits for approval to the head.
The act of writedown may take the form of a description-act, which was used during the writedown until the spring of 2016, until the Regulation on the procedure for depreciation and sale of dependent products from the group of consumer goods, industrial products and surplus goods, material values, approved by Order of the Ministry of Economy of Ukraine and the Ministry of Finance of Ukraine No. 149/300 of December 15, 1999 (expired on March 9, 2016) (hereinafter – the Regulation on depreciation), or may be issued in any form. For an act drawn up in any form to have legal force, it must contain all the obligatory details of the original document.
4. The head approves the act of writedown in two copies. The first copy of the act is transferred to the accounting department, the second – to the financially responsible person.
5. On the basis of the received act the results of writedon are reflected in accounting.
Accounting
On the basis of the act of writedown, the historic cost of inventories is adjusted in accounting. Namely, the amount by which the historic cost of inventories exceeds the net realizable value (ie the amount of the writedown) is written off against the expenses of the reporting period (item 27 of NAS 9). Reflect the writedown on Dt sub-account 946 “Losses from impairment of inventories” and at the same time reduce the book value of the relevant inventories (clause 5.8 of Methodological Recommendations No. 2).
If the inventories (namely goods) of retail enterprises, which account for goods at selling prices, are deprecated, they reflect the writedown taking into account certain specifics. Namely, they must divide the amount by which the value of the goods is reduced (the amount of the discount) into two components:
1) the amount of reduction of trade margin. For this amount, they form the conduct of Dt 285 – Kt 282;
2) the amount of reduction of the historic cost of goods. In this case, they form the conduct of: Dt 946 – Kt 282.
If the net realizable value of inventories that have already been wrotedown and which are currently assets of the enterprise, increases on the balance sheet date, then the company must increase the value inventories on the amount of increase in net realizable value, but not more than the amount of the previous decrease. Namely, to recognize other operating income with an increase in the value of these inventories (item 28 NAS 9).
The amount of such increase is shown on sub-account 719 “Other income from operating activities” (clause18 of Annex 3 to Methodological Recommendations No. 2).
