With the effect from accounting statements for 2021, a new FAS 5/2019 “Inventories”, approved by the Order No. 180н dated November 15, 2019 of the Ministry of Finance of the Russian Federation, applies for accounting of inventories. It supersedes RAS 5/01 “Accounting of Inventories”. In addition, the methodical guidelines on accounting of inventories and methodical guidelines on accounting of special tools and special clothes became invalid. Tatyana Ablekova, our lead auditor, has analysed the scope of changes.
What are the inventories
For the business accounting purposes, the inventories are assets consumed or sold within the ordinary course of organization’s cycle, or used within the period of up to 12 months.
Let’s consider the main peculiarities of inventory accounting as per FAS 5/2019
- the inventories include the construction in-progress inventories and immovable property for sale. Moreover, now the inventories have to be assessed twice: at the time of and after recognition;
- the lists of expenses to be included in the price of inventories are to change, which will make it necessary to modify the production cost calculation system;
- now the long-term forecast of consequences of inventory acquisition (creation) is required. The net cost will include the amount of estimated liability for dismantling, disposal of inventories and environmental remediation;
- the fair value under IFRS will have to be used, including when paying for inventories by non-monetary assets.
Objectives of inventory accounting
When taking account of inventories the following objectives may be distinguished:
- Evaluation when recognising the inventory items
- Evaluation after recognition of the inventory items
- Accounting procedure for inventory issue and write-off
- The necessary disclosures on inventories in accounting records
- Changes in accounting policy
Basic changes in inventory accounting in FAS 5/2019
- FAS 5/2019 need not to be used with respect to administrative inventories. This must be fixed in accounting policy, in which case the acquisition costs will be recognized in the period, in which they are incurred.
- Discounts, bonuses and similar rebates are deducted from the actual net cost regardless of the form of their presentation. A discount must be recognized based on the probability of receiving the same, even if at the time of inventory acquisition it is not received. Formerly, in RAS 5/2001 the probability of receiving was not taken into account for determination of the actual net cost of inventories. The discount was excluded only at the time of their receipt.
- Now, the actual net cost of inventories acquired on condition of payment deferment by more than 12 months is determined based on the amount paid to the supplier with consideration for the discounting.
Changes in forming the provision for impairment of inventories should be pointed out.
According to former rules, one had to set up the provision for impairment of tangible assets in case of their obsolescence, loss of quality or fair value reduction. According to FAS 5/2019, the inventories are evaluated as of the reporting date based on the lower of:
- actual net cost,
- net sales value.
Where the net sales value is less than actual net cost, a provision for impairment of inventories is created for the amount of difference.
Disclosure of information on inventories in accounts
The following information shall be disclosed in the accounting (financial) statements with due account of materiality:
- book value of inventories as of the beginning and end of a reporting period;
- reconciliation of inventory stock in terms of actual net cost and impairment as of the beginning and end of a reporting period and inventory movement in the reporting period;
- in case of recovery before creation of the provision for impairment, the reasons of increase in the inventory sales value;
- book value of inventories, in respect of which there are restrictions of the company’s rights of property, including the pledged inventories;
- method of calculation of the inventory net cost;
- consequences of changes in the method of calculation of the inventory net cost (as compared to the previous reporting period);
- advances, prepayments, security deposits paid by the organization in connection with acquisition, creation, processing of inventories.
Changes in accounting policy
In connection with application of FAS 5/2019 “Inventories”, the companies must introduce changes in the accounting policy, i. e.:
- delete references to all regulatory acts, which became invalid due to introduction of FAS 5/2019;
- fix the composition of inventories pursuant to cl. 3 of FAS 5/2019;
- make decision on accounting of inventories intended for administrative purposes;
- provide for the accounting of fixed assets and special clothes;
- establish the procedure for calculation of the provision for impairment of inventories etc.
Our auditors are ready to help you in developing the new accounting policy in connection with application of new standards for accounting of inventories. You may submit the application for development (improvement) of your accounting policy by e-mail specified in “Contacts” section with the “Application for Accounting Policy” in the subject line.
