Query No. 16

Subject:   

A. Facts of the Case

1. A company is engaged in transmission, processing and marketing of natural gas.  Besides sale to different customers, natural gas is also used internally by the company as a major raw material for the manufacture of LPG, polymers and other value added products and as a fuel.

B. Query

2. The querist has sought the opinion of the Expert Advisory Committee on the basis of valuation of inventories of natural gas and other raw materials, intermediates and supplies held by the company for use in production if the related finished products are expected to be sold at or above cost.

C. Points Considered by the Committee

3.  Paragraph 24 of AS 2 states the following:

“24.  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 there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed 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.”

4. Based on the above, the Committee is of the view that natural gas and other raw materials, intermediates and supplies held for use in the production of inventories are not to be written down below cost if the related finished products are expected to be sold at or above cost.  In other words, they should be valued at cost (provided, of course, that the related finished products are expected to be sold at or above cost).

D. Opinion

5.  On the basis of the above, the Committee is of the opinion that natural gas and other raw materials, intermediates and supplies held for use in production should be valued at cost if the related finished products are expected to be sold at or above cost.

¹Opinion finalised by the Committee on 22.4.2000.