Fact pattern

‘Net realisable value’ (NRV) of inventories in IAS 2 Inventories is defined as (emphasis added):

“The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale”

IAS 2, paragraphs 28-33 include requirements about how NRV is estimated, but do not identify which costs are ‘necessary to make the sale’.

Question:

Should all costs necessary to make the sale be deducted when estimating NRV, or just those that are incremental to the sale?

Rationale for agenda decision:

IAS 2, paragraph 28

• IAS 2, paragraph 28 notes that the objective of writing inventories down to NRV is to avoid inventories being carried in excess of amounts expected to be realised from their sale.
• The requirement to estimate costs ‘necessary to make the sale’ means that entities therefore cannot limit such costs to only incremental costs because to do so would not achieve the objective set out above.

Conclusion:

When determining NRV of inventories, entities must estimate all costs necessary to make the sale in the ordinary course of business. Entities must use judgement to determine which costs are necessary to make the sale, considering specific facts and circumstances, including the nature of the inventories.

The Committee decided not to add a standard-setting project to its work plan because it concluded that the principles and requirements in IFRS provide an adequate basis for an entity to determine whether the estimated ‘costs necessary to make the sale’ are limited to incremental costs when determining NRV.

Fact pattern A

During the current reporting period, Entity A determines that it is no longer a going concern and will therefore not prepare its current period financial statements on a going concern basis.

Entity A was a going concern in the prior reporting period but has not yet prepared financial statements for that prior period.

Question:

Can Entity A prepare its prior period financial statements on a going concern basis if it had not previously prepared financial statements for the prior period?

Rationale for agenda decision:

IAS 10, paragraph 14

• An entity shall not prepare financial statements on a going concern basis if management determines after the reporting period that it intends either to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

Conclusion:

An entity that is no longer a going concern cannot prepare financial statements on a going concern basis (including for prior periods that have not yet been authorised for issue).

The Committee concluded that the principles and requirements in IFRS provide an adequate basis for an entity that is no longer a going concern to determine whether it prepares its financial statements on a going concern basis.

Fact pattern B

During the current reporting period, Entity A determines that it is no longer a going concern and will therefore not prepare its current period financial statements on a going concern basis.

Entity A was a going concern in the prior reporting period and previously issued financial statements prepared on the going concern basis.

Question:

When preparing the current period financial statements, must Entity A restate comparative information to reflect the basis of accounting used in the current period financial statements (i.e. not a going concern)?

Rationale for agenda decision:

• None provided by the Committee.

Conclusion:

Based on its research, the Committee observed no diversity in practice and did not obtain evidence that the matter had widespread effect. That is, of the entities observed, none had restated their comparatives to be on a non-going concern basis.

The Committee therefore decided not to add a standard-setting project to its work plan.