Proposed IVS 230 - Inventory

The IVSC has issued a consultation draft on a proposed new standard, IVS 230 Inventory. In the context of this paper, “inventory” is:

Raw materials, parts and supplies which will be used in future production processes,
Work in progress and
Finished goods awaiting sale.

This is effectively the same as the definition in the financial reporting standard, IAS 2. Inventory covers an extremely wide range of things with widely different characteristics, from steel held by an auto manufacturer to produce vehicles, ingredients acquired by a food producer for its cakes through to wine and spirits held by a hotel for serving to its customers. Inventory can include any item owned or controlled by a business enterprise that is not classed as a “fixed asset”, which are assets held for the purpose of producing goods or services over time. So in the examples just given fixed assets would include the factory used to make the vehicles, the ovens used to bake the cakes or the hotel building.

The full consultation paper can be viewed here.

Comments to IVSC are required by 30 June 2020.

Our detailed comments to IVSC can be viewed here.

We provide a few highlights and comments below. In summary we believe that while there is a case for guidance on the issues featured in the draft, it is inappropriate to issue this as a mandatory standard.

This is a proposed new “Asset Standard”. According to the introduction to the IVS, Asset Standards include requirements related to specific types of assets. These requirements must be followed in conjunction with the General Standards when performing a valuation of a specific asset type.

Comment:

Inventory is not an asset type that is aligned with any of the other assets for which there are existing Asset Standards in the IVS. Whether an item is classified as inventory depends on how the item is intended to be used rather than what it is.

The distinction between inventory and fixed assets is mostly relevant for accounting purposes, although in some jurisdictions may also be relevant in tax assessments.

Comment:

The preamble to the draft makes extensive reference to USA accounting practice, with guidance being developed by the AICPA and the requirements of the FASB for inventory being given prominence over those under IFRS, which is used in most of the World. The IVS should focus on matters that have global application and leave standards and guidance on their application in specific countries to the relevant bodies in those countries.

The proposed draft excludes real property from its scope, on the premise that real property inventory is already covered by IVS 410 .

Comment:

It is only partially true that IVS 410 covers real property inventory. Any type of real property can be categorised as inventory. Although some development property may be categorised as inventory, IVS 400 Real Property Interests is of more general relevance. Moreover, some of the issues raised in the draft such as identifying the contribution of intangible assets and the appropriate allocation of profit apply just as much to certain real property interests as they do to other asset types.

The only imperative requirements in the draft are that the valuer must i) select an appropriate basis of value, ii) select an appropriate approach or method and iii) understand and follow the relevant regulation, case law, and other interpretive guidance.

Comment:

These three requirements already appear in IVS 104 and IVS 105 where they apply to any valuation under IVS, so their inclusion here is superfluous. The remainder of the draft is a discussion of methods that may be appropriate for valuing certain inventory items or of matters that may need to be considered in different circumstances. The flexibility suggested by the language sits uncomfortably with the designation of the document as a standard that is mandatory, or at least “presumptively mandatory” and may lead to situations where identified methods are applied inappropriately.