Consistency - Different Cost Formulas for Inventories
Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items.
Reference: FRS 2, Inventories
ISSUE
FRS 2.20 allows various cost formulas (FIFO or weighted average cost) for inventories that are ordinarily interchangeable or are not produced and segregated for specific projects.
The issue is whether an enterprise may use different cost formulas for different types of inventories.
CONSENSUS
3.
An enterprise should use the same cost formula for all inventories having similar nature and use to the enterprise. For inventories with different nature or use (for example, certain commodities used in one business segment and the same type of commodities used in another business segment), different cost formulas may be justified. A difference in geographical location of inventories (and in the respective tax rules), by itself, is not sufficient to justify the use of different cost formulas.
BASIS FOR CONCLUSIONS
4.
To ensure comparability, paragraph 35 of the FRS Framework explains that the measurement of like transactions and other events must be carried out in a consistent way throughout an enterprise and over time in separate and consolidated financial statements. In consolidated financial statements, FRS 27.20 and FRS 27.21 require uniform accounting policies for like transactions and other events in similar circumstances.
5.
To ensure comparability, paragraph 35 of the FRS Framework explains that the measurement of like transactions and other events must be carried out in a consistent way throughout an enterprise and over time in separate and consolidated financial statements. In consolidated financial statements, FRS 27.20 and FRS 27.21 require uniform accounting policies for like transactions and other events in similar circumstances.
6.
As a result of analysing the characteristics of inventories, some might, for example, be measured using the FIFO method and others, with different nature or use, using the weighted average cost method.
Effective Date: INT FRS 1 comes into effect on 1 February 2003. Changes in accounting policies should be accounted for according to the transitional requirements in FRS 8.40.
