1.12 Query
Valuation of Finished Goods Inventories
1.A company values its finished goods at list prices as they are lower than the cost, on the principle of valuing inventories, itemwise, at cost or market price whichever is lower. The average net realized value of the stocks is less than the list prices.
2.The querist has also informed that there are only three manufacturers of fiberglass in India, including the said company. Whereas the other two manufacturers are marketing about 2000 MTs. The company is marketing only 400 MTs. The market prices of the other two manufacturers are higher than those of the company- 10%-20% in the case of one manufacturer manufacturing 1200 MTs and 20%-30% in the case of other manufacturer manufacturing 800 MTs - even though the quality and other things of the product are same. It has been informed that the average net realizable value on the products of the company is lower, because the company does not have financial back-up and therefore is not able to withstand the competition as the demand of the product is less than the supply.
3.The company has also been selling one of its products-‘Rovings’- to one of its parties at a contracted price which is much lower than the price at which they are sold to others.
4.The querist has sought the opinion of the Expert Advisory Committee, on the following issues arising from the facts stated in above paragraphs:
i) Whether the stocks can be continued to be valued on consistent basis at list prices which remain unchanged. The list prices were lower than the cost at the time of opening stocks in the beginning of the year and also remains lower than the cost at the end of the year.
ii) What is the concept of General Market Price under International Accounting Standard No. 2? Is it applicable to the company? If yes, whether the stocks should be valued at General market price or at list price or at average net realizable value under the circumstances given above.
Opinion September 18,1984
1.The Committee
notes that Accounting Standard (AS-2) ‘Valuation of Inventories’ issued by the
Institute of Chartered Accountants of India, recommends that “……. inventories
should be valued at lower of historical cost and net realizable value” (Para
24). The term ‘Net Realisable Value’ has been defined as “the actual/estimated
selling price in the ordinary course of business, less cost of completion and
cost necessarily to be incurred in or to make the sale” (Para 6.9 of AS-2).
2.The Committee
further notes that International Accounting Standard (IAS) 2 on ‘Valuation and
Presentation of Inventories in the Context of the Historical Cost System’, has
recommended in para 30 that the “net realizable value of the quantity of
inventory held to satisfy firm sales contracts should be based on the contract
price. If the sales contracts are for less than the inventory quantities held,
net realizable value for the excess should be based on general market price.”
(The expression General Market Price has not been explained in the IAS). The
Committee, however, notes that AS-2 of the Institute of Chartered Accountants of
India, has not recommended any special basis for ascertainment of net realizable
value where goods are sold under firm sales contracts. Thus, in this case also,
the general principles of valuation of inventories laid down in AS-2 which are
quoted in para1 above, will apply.
3.On the basis of the above considerations, the opinion of the Expert Advisory
Committee, on the issues raised by the querist, is as
below:
(i) Since the list prices are higher than the net realizable values of the stocks, the stocks should be valued at net realizable values and not continued to be valued at list prices.
(ii) The concept of general market price is not applicable to the company. Therefore, the net realizable value in respect of goods held to satisfy firm sales contracts should be computed on the basis of the contract price and that of the remaining goods, on the basis of the actual/estimated selling price in the ordinary course of business. Where the net realizable value is higher than the cost, the goods should be valued at cost.
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