Tài liệu Inventories – a comparison of vas and ias

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FACULTY OF ECONOMICS AND COMERCE HOA SEN UNIVERSITY Project 1: INVENTORIES – A COMPARISON OF VAS AND IAS KT205DE01 Lecturer: PhD. Nguyễn Thanh Nam December 19th, 2012 FACULTY OF ECONOMICS AND COMERCE Project 1: INVENTORIES – A COMPARISON OF VAS AND IAS KT205DE01 Members Nguyễn Thị Hoàng Yến Trương Thúy Vi Đoàn Diệp Bích Ngân December 19th, 2012 093400 093395 101439 Hoa Sen University Project 1 - Report 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. i Hoa Sen University Project 1 - Report TABLE OF CONTENT ABSTRACT ...................................................................................................................... i TABLE OF CONTENT ................................................................................................... ii ACKNOWNLEDGEMENTS ......................................................................................... iii PREFACE ....................................................................................................................... iv 1. INTRODUCTION ....................................................................................................1 1.1. 2. 3. Introduction of Accounting Standards applying to "Inventories” ............... 1 COMPARISON OF IAS 2 AND VAS 2 ..................................................................3 2.1. General Provisions ...................................................................................... 3 2.2. Contents of the Standard ............................................................................. 3 CONCLUSION AND SUGGESTION ...................................................................15 3.1. Conclusion ................................................................................................. 15 3.2. Suggestion ................................................................................................. 15 APPENDIX .................................................................................................................... 16 REFERENCES ............................................................................................................... 26 SUPPERVISOR‟S REMARK ....................................................................................... 27 ii Hoa Sen University Project 1 - Report 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. iii Hoa Sen University Project 1 - Report 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. iv Hoa Sen University Project 1 - Report 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. 1 Hoa Sen University Project 1 - Report 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. 2 Hoa Sen University Project 1 - Report 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: 3 Hoa Sen University Project 1 - Report 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. 4 Hoa Sen University Project 1 - Report 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 Receipts Date Quantity January 10 Rate 15 Issues £ Quantity Balance Rate £ 150 February 8 15 120 Quantity Rate £ 10 150 2 30 March 10 17 170 12 200 April 20 20 400 32 600 May 2 15 30 10 17 170 12 20 240 Cost of goods sold Inventory 560 8 20 160 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. 5 Hoa Sen University Project 1 - Report Receipts Date Quantity January 10 Rate 15 Issues £ Quantity Balance Rate £ 150 February 8 15 120 Quantity Rate £ 10 150 2 30 March 10 17 170 12 200 April 20 20 400 32 600 May 24 18.75 Cost of goods sold Inventory 450 600 570 8 18.75 150 The equation for average cost method is as follows. Where: 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 highvolume / 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. 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. 6 Hoa Sen University Project 1 - Report 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‟ Receipts Date Quantity January Rate 10 15 Issues £ Quantity Balance Rate £ 150 February 8 15 120 Quantity Rate £ 10 150 2 30 March 10 17 170 12 200 April 20 20 400 32 600 8 132 May 20 20 400 4 17 68 Cost of goods sold 588 Inventory 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... 7 Hoa Sen University Project 1 - Report 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. 8 Hoa Sen University Project 1 - Report In 2011 Dr 632: 4000 Cr 159: 4000 At the end of 2011 Dr 632: 3000 Cr 159: 3000 2.2.4. Recognition as an Expense IAS 2 specified items that are recognized as costs are: value of inventory is sold; adjustments of reducing net realizable value; loss of inventory; extraordinary waste; factory overhead costs are not disclosed. 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. 9 Hoa Sen University Project 1 - Report 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. 10 Hoa Sen University Project 1 - Report o This method can distort the affection on the Balance Sheet because the value of inventory is often reflected by the oldest prices, make the working capital is often reflected wrongly. o LIFO method causes the incompatibility between the value of inventory and the materials of specific goods. This makes the value of inventory in the financial statements do not reflect the nature of its economy. o In the case where there is no effect of tax, this method creates loopholes for managers to cheat on company‟s profit. 2.2.6. Presentation of Financial Statements For preparing financial statement, there are some similarities and differences between International Accounting Standard and Vietnamese Accounting Standard. i. In their financial statements, the enterprises must present: o For Vietnamese Accounting Standard: a) Accounting policies applied in the appraisal of inventories, including the method of computing the value of inventories; b) The original prices of the total inventories and of each kind of inventories which are classified in a suitable way to the enterprise; c) The value of the inventory price decreases reserve; d) The value re-included from the inventory price decreases reserve; e) Cases or events resulting in the addition to or re-inclusion from the inventory price decrease reserve; f) The book value of inventories (the original price minus (-) the inventory price decrease reserve) already mortgaged or pledged for payable debts. o For International Accounting Standard: a) Disclosures needed for:  Accounting policies applied adopted in measuring inventories, including the cost formula used.  Inventory remaining on statement of financial position 11 Hoa Sen University Project 1 - Report  Inventory costs recognized in profit or loss b) In balance sheet:  Carrying amount in each category of inventory (materials, WorkIn-Process, finished goods, production supplies, merchandise) and in total  Carrying amount of any inventory measured at fair value less costs to sell  Carrying amount of inventory pledged as collateral for liabilities c) In income statement:  Amount of inventory recognized as an expense (usually cost of sales/cost of goods sold)  Amount of write-downs to net realizable value or other losses  Amount of any write-down reversals  Circumstances that resulted in reversals o For Vietnamese Accounting Standard: ii. Where the enterprises compute the value of inventories by the Last-in, Firstout method, their financial statements must show the difference between the value of inventories presented in the accounting balance sheet and: a) The period-end value of inventories, which is calculated by the First-in, First-out method (if this value is lower than the period-end value of inventories calculated by the weighted average method as well as the net realizable value). b) The period-end value of inventories which is calculated by the weighted average method (if this value is lower than the period-end value of inventories calculated by the First-in, Fist-out method as well as the net realizable value). c) The period-end value of inventories which is calculated according to the net realizable value (if this value is lower than the value of inventories calculated by the First-in, First-out method and the weighted average method) 12 Hoa Sen University Project 1 - Report d) The period-end current value of inventories on the date the accounting balance sheet is made (if this value is lower than the net realizable value); or, and the net realizable value (if the period-end value of inventories which is calculated according to the net realizable value is lower than the period-end value of inventories which is calculated according to the current value on the date the accounting balance sheet is made). iii. Presentation of inventories costs in the reports on the production and business results, which are classified functionally. iv. Functional classification of costs means that inventories are presented in the section “Original price of goods sold” in the business result reports, including the original price of goods sold, the inventory price decrease reserve, damaged and lost volumes of inventories after subtracting the compensations paid by individuals due to their liabilities, and unallocated general production costs o For International Accounting Standard: ii. The carrying amount of inventories pledged as security for liabilities. iii. Information about the carrying amounts held in different classifications of inventories and the extent of the changes in these assets is useful to financial statement users. Common classifications of inventories are merchandise, production supplies, materials, work in progress and finished goods. The inventories of a service provider may be described as work in progress. iv. The amount of inventories recognized as an expense during the period, which is often referred to as cost of sales, consists of those costs previously included in the measurement of inventory that has now been sold and unallocated production overheads and abnormal amounts of production costs of inventories. The circumstances of the entity may also warrant the inclusion of other amounts, such as distribution. 13 Hoa Sen University v. Project 1 - Report Some entities adopt a format for profit or loss that results in amounts being disclosed other than the cost of inventories recognized as an expense during the period. Under this format, an entity presents an analysis of expenses using a classification based on the nature of expenses. In this case, the entity discloses the costs recognized as an expense for raw materials and consumables, labour costs and other costs together with the amount of the net change in inventories for the period. 14
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