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Commission Regulation (EC) No
2238/2004 of 29 December 2004 amending Regulation (EC) No 1725/2003
adopting certain international accounting standards in accordance
with Regulation (EC) No 1606/2002 of the European Parliament and of
the Council, as regards IASs IFRS 1, IASs Nos 1 to 10, 12 to 17, 19
to 24, 27 to 38, 40 and 41 and SIC Nos 1 to 7, 11 to 14, 18 to 27
and 30 to 33
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Net Realisable Value
28. The cost of
inventories may not be recoverable if those inventories are
damaged, if they have become wholly or partially obsolete, or
if their selling prices have declined. The cost of inventories
may also not be recoverable if the estimated costs of
completion or the estimated costs to be incurred to make the
sale have increased. The practice of writing inventories down
below cost to net realisable value is consistent with the view
that assets should not be carried in excess of amounts
expected to be realised from their sale or use.
29. Inventories are
usually written down to net realisable value item by item. In
some circumstances, however, it may be appropriate to group
similar or related items. This may be the case with items of
inventory relating to the same product line that have similar
purposes or end uses, are produced and marketed in the same
geographical area, and cannot be practicably evaluated
separately from other items in that product line. It is not
appropriate to write inventories down on the basis of a
classification of inventory, for example, finished goods, or
all the inventories in a particular industry or geographical
segment. Service providers generally accumulate costs in
respect of each service for which a separate selling price is
charged. Therefore, each such service is treated as a separate
item.
30. Estimates of net
realisable value are based on the most reliable evidence
available at the time the estimates are made, of the amount
the inventories are expected to realise. These estimates take
into consideration fluctuations of price or cost directly
relating to events occurring after the end of the period to
the extent that such events confirm conditions existing at the
end of the period.
31. Estimates of net
realisable value also take into consideration the purpose for
which the inventory is held. For example, the net realisable
value of the quantity of inventory held to satisfy firm sales
or service contracts is based on the contract price. If the
sales contracts are for less than the inventory quantities
held, the net realisable value of 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. Such provisions are dealt with under IAS
37 Provisions, Contingent Liabilities and Contingent
Assets.
32. Materials and
other supplies held for use in the production of inventories
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 to net
realisable value. In such circumstances, the replacement cost
of the materials may be the best available measure of their
net realisable value.
33. A new assessment
is made of net realisable value in each subsequent period.
When the circumstances that previously caused inventories to
be written down below cost no longer exist or when there is
clear evidence of an increase in net realisable value because
of changed economic circumstances, the amount of the
write-down is reversed (ie the reversal is limited to the
amount of the original write-down) so that the new carrying
amount is the lower of the cost and the revised net realisable
value. This occurs, for example, when an item of inventory
that is carried at net realisable value, because its selling
price has declined, is still on hand in a subsequent period
and its selling price has increased.
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