Accounting Principle Research - Inventory - Comparison of VAS and IAS

Accounting Principle Research - Inventory - Comparison of VAS and IAS

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ABSTRACT

The System of International Accounting Standards (IAS) is the principled standards which have been adopted by many countries and enterprises around the world In this report, we would like to compare the "Inventories" account based International Accounting Standards (IAS) and Vietnamese Accounting Standards (VAS) to find out similarities and differences Thereby we would like to enhance the professional knowledge and also learn, get familiar with the legal provisions related to the field of accounting

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TABLE OF CONTENT

ABSTRACT i

TABLE OF CONTENT ii

ACKNOWNLEDGEMENTS iii

PREFACE iv

1 INTRODUCTION 1

1.1 Introduction of Accounting Standards applying to "Inventories” 1

2 COMPARISON OF IAS 2 AND VAS 2 3

2.1 General Provisions 3

2.2 Contents of the Standard 3

3 CONCLUSION AND SUGGESTION 15

3.1 Conclusion 15

3.2 Suggestion 15

APPENDIX 16

REFERENCES 26

SUPPERVISOR‟S REMARK 27

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ACKNOWNLEDGEMENTS

First and foremost we offer our sincerest gratitude to our project supervisor, Mr Nguyen Thanh Nam, who has supported us throughout our project with his professional guidance and valuable support His willingness to give his time so generously has been very much appreciated

Special thanks should be given to Mr Ho Sy Tuy Duc for his useful and constructive recommendations on this project

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PREFACE

During the twelve week of studying and researching, our group has synthesized the knowledge of the rules and principles from the two systems of International Accounting Standards (IAS) and Vietnamese Accounting Standards (VAS) which relate to "Inventories" Account In the following, we will briefly introduce the two above-mentioned accounting standards system as well as the differences between them

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1 INTRODUCTION

1.1 Introduction of Accounting Standards applying to "Inventories”

International Accounting Standards (IAS) is the harmonization of regulations, accounting principles and methods to be accepted, acknowledged a general practice among the countries However, the harmony that cannot be forced all countries to comply with the accounting records and present financial statements in accordance with the provisions of International Accounting Standards Because each country has conditions and different level of economic development, and management degree requirements are not quite the same Therefore, based on the platform of International Accounting Standard system to develop and promulgate national accounting standards system is an indispensable need Vietnamese Accounting Standards (VAS) is no exception to that practice

Before opening and integration, Vietnam has no accounting standards, only the accounting regimes Accounting regimes are defined by the Ministry of Finance (MOF) They were mainly to guide the state-owned enterprises and cooperatives perform accounting work At the end of 2001, MOF issued the first four Vietnamese accounting standards By December 2005, the MOF has issued all 26 accounting standards

Within the scope of this report, the aim of this paper is to discuss about the comparison of Accounting Standards applying to “Inventory” of IAS and VAS to find the similarities and differences between them

Introduction of Accounting Standards “Inventories”

Accounting standards are regulations and guidance on the accounting principles and methods as the basis for the accounting records and financial statements

Standards “Inventory” is built to regulate and guide the principles and methods

of inventory accounting to reflect on the account a reasonably accurate basis for the preparation of reports finance

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International Accounting Standard No 2 “Inventories” (IAS 2) is issued, published in 1975 Vietnamese Ministry of Finance based on the International Accounting Standards and the actual conditions issued Accounting Standards

"Inventories" (VAS 2) dated December 31, 2001

On the basis of the content of the standards "Inventory" is defined in IAS 2 and VAS 2, this study will focus on the comparison of the similarities and differences between them

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2 COMPARISON OF IAS 2 AND VAS 2

For comparing IAS 2 and VAS 2, we make the basic contents: General Provisions, content standards, regulations on the establishment and presentation of financial statements

2.1 General Provisions

Both standards “Inventory” of the International Accounting Standards and Vietnamese Accounting Standards all have the same purpose as regulations and guidance on the principles and methods of inventory accounting Including: Define inventory; Accounting principles applied to inventory; Valuation of inventories; Method of calculating the value of inventory as a basis for accounting entries and financial statements

Standards “Inventory” of the Vietnamese accounting and international scope as follows: This standard applies to all inventory assets, including:

o assets held for sale in the ordinary course of business (finished goods);

o assets in the production process for sale in the ordinary course of business (work in process);

o and materials and supplies that are consumed in production (raw materials);

o For the service provider, inventories include the cost of services corresponding to deferred revenue

The principles are applied in accounting standards inventory: principle of prudence, principle of consistency and matching principle

2.2 Contents of the Standard

2.2.1 Determination of Value of Inventories

An inventory valuation allows a company to provide a monetary value for items that make up their inventory Inventories are usually the largest current asset of

a business, and proper measurement of them is necessary to assure accurate financial statements If inventory is not properly measured, expenses and revenues cannot be properly matched and a company could make poor business decisions

Inventories are assets:

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o Held for sale in the ordinary course of business

o In the process of production for such sale

o In the form of materials or supplies to be consumed in the production process or in the rendering of services

Net realizable value is 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

Inventories encompass goods purchased and held for resale, for example, merchandise purchased by a retailer and held for resale, computer software held for resale, or land and other property held for resale Inventories also encompass finished goods produced, or work in progress being produced, by the enterprise and include materials, maintenance supplies, consumables and loose tools awaiting use in the production process Inventories do not include machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular; such machinery spares are accounted for in accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets

The valuation of inventory involves:

o The establishment of physical existence and ownership;

o The determination of unit costs;

o The calculation of provisions to reduce cost to net realizable value, if necessary

The resulting evaluation is then disclosed in the financial statements

These definitions appear to be very precise We shall see, however, that although IAS 2 was introduced to bring some uniformity into financial statements, there are many areas where professional judgment must be exercised Sometimes this may distort the financial statements to such an extent that we must question whether they do represent a „true and fair‟ view

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2.2.2 Method of Calculating Value of Inventories

According to the IAS 2, the acceptable methods of inventory valuation include FIFO, AVCO and standard cost

a) First-in-first-out (FIFO)

Inventory is valued at the most recent „cost‟, since the cost of oldest inventory

is charged out first, whether or not this accords with the actual physical flow

As a formula it would look like this:

Unit Cost per batch = (Cost/Quantity) for each batch

Where:

Cost of Goods Sold = (Unit Cost x Quantity) for each batch

Date Quantity Rate £ Quantity Rate £ Quantity Rate £

b) Average cost (AVCO)

Inventory is valued at a „weighted average cost‟, i.e the unit cost is weighted

by the number of items carried at each „cost‟ This is popular in organisations holding

a large volume of inventory at fluctuating „costs‟ The practical problem of actually recording and calculating the weighted average cost has been overcome by the use of sophisticated computer software

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Date Quantity Rate £ Quantity Rate £ Quantity Rate £

Cost of Goods Sold = (Average Unit Cost) x (Number of Units Sold)

c) Standard cost

In many cases this is the only way to value manufactured goods in a volume / high turnover environment However, the standard is acceptable only if it approximates to actual cost This means that variances need to be reviewed to see if they affect the standard cost and for inventory evaluation

high-d) Retail method

IAS 2 recognizes that an acceptable method of arriving at cost is the use of selling price, less an estimated profit margin This method is only acceptable if it can

be demonstrated that the method gives a reasonable approximation of the actual cost

IAS 2 does not recommend any specific method This is a decision for each organization based upon sound professional advice and the organization‟s unique operating conditions

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However, the differences between IAS2 and VAS2 are: VAS2 also has the same method of calculating value of inventories as IAS2 However, VAS2 has not eliminated the LIFO method and doesn‟t mention the Standard cost method

For Last-in-first-out (LIFO):

The cost of the inventory most recently received is charged out first at the most recent „cost‟

The practical upshot is that the inventory value is based upon an „old cost‟, which may bear little relationship to the current „cost‟

Date Quantity Rate £ Quantity Rate £ Quantity Rate £

May closing balance = [(2 x 15) + (6 x 17)]

2.2.3 Allowance for inventory obsolescence

Inventory obsolescence is when inventory is no longer salable Possibly due to too much inventory on hand, out of fashion or demand The true value of the inventory is seldom exactly what is shown on the balance sheet Often, there is unrecognized obsolescence

o Starting from the precautionary principle is not rated higher than the value

of the asset

o The cause of the net realizable value is less than the original price: inventory is damaged, obsolete; reduced price; finishing costs, cost of sales increased

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According to IAS 2, mention the provision of net realizable value and the value may be lower than the original cost The writing off of inventories to net realizable value is consistent with the principle of recorded assets, which means assets are recorded not more than the actual value is estimated from the selling or using them

According to VAS 2:

o At the end of the accounting year, when the net realizable value of inventories is lower than the original cost, we must make the provision for devaluation of stocks The provision for devaluation of stocks which is made is the difference between the original cost of inventory and the net realizable value (original cost > net realizable value) The provision for devaluation of stocks is made on the basis of each inventory For services provided in progress, the provision for devaluation of stocks is calculated for each type of service with a separate price

o Making provision is when there is price changing, direct costs relate to events occurring after the end of the fiscal year, these events are confirmed with the conditions that were estimated at that time

o The special cases: When the merchandise inventories are larger than requirements, the difference, the net value is assessed on the basis of estimated selling prices Raw materials, supplies, tools to use reserves for production purposes must not be estimated lower than the original cost if the products that they help to make up will be sold at or above production cost When there is a decrease in the price of raw materials, materials, tools and instruments but the production costs is higher than net realizable value, the materials, tools, equipment are evaluated lower to be equal with net realizable value

o Reversal of provision: Ensuring the appropriate principles between costs and revenues in the accounting period

Example: At the end of 2010, the company A discounted its inventory to 1000, original cost is 50, estimated selling price is 45, and selling expense is 2 In 2011, the value of inventories of company A was reduced to 4000 At the end of 2011, the provision for devaluation of stocks for the next year was 3000

VAS 2: When you sell inventory, cost of inventory sold is recorded as cost of production, sales in the period in accordance with related revenues are recorded All the differences between the provision for devaluation of stocks that is made at the end

of the accounting year have to be greater than the provision for devaluation of stocks that set up at the end of the accounting year, the loss of inventory, after deducting the compensation caused by personal responsibility, and general production costs not allocated, are recorded as general and admin expense in the period In case of the provision for devaluation of stocks is made at the end of this accounting year less than the provision for devaluation of stocks that was set up at the end of the previous accounting year, the larger difference is reversed to reduce the cost of manufacture and trading

Recognizing the value of inventory and putting it into this period expenses have to ensure the principle of matching of costs and revenues

2.2.5 Effect of method of calculating value of inventories on a company’s financial statement

Inventory valuation method that businesses apply can directly affect the Balance Sheet, Income Statement and Cash Flow Statement of the business Because the cost of goods sold reflected in the Income Statement and the value of ending inventory is shown in the Balance Sheet

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Without inflation, the methods of calculating value of inventory will give the same results However, in the long term period, prices tend to increase If the price increases gradually, each accounting method for calculating value of inventory will give the following results:

o FIFO method: Make high value of ending inventory but does not reflect the real value (reflected on Balance Sheet), but it also increases the net profit because the inventory of few years ago may be used to determine the cost of goods sold Because this method ensures the compatibility between current revenue and current expenses, it reflects the profit of the business, creating

"the inventory profit" However, it is also a potential to increase the enterprise income tax payable

o LIFO method: Make low value of ending inventory value but does not reflect the real value (reflected on Balance Sheet) This is the result of the calculation that make the value of ending inventory much lower than the current price This method gives results in lower net income because cost of goods sold is determined to be higher

o The average cost method: Do not associated revenue and stock-out at the point of time, but the average stock price When the unit price increase or decrease, the total cost of stock-out will be in the middle of the value of inventory under FIFO and LIFO methods

Although LIFO method has certain advantages but in general, the application

of the LIFO method can have some negative impacts The reasons not to adopt this method are:

o In the long term period, when prices rise, the value of inventory is reflected lower than its value Therefore, the inventory targets on the Balance Sheet

do not reflect closely to the market price at the time of reporting, which leads to the value assets of the business are recorded lower than its actual value

o This method can distort the profit in the period, create the misunderstanding about the profitability of the business