Analysis of the International Accounting Standards on Inventory

Analysis of the International story quantitys on InventoryThis eassy princip anyy introduced the information ab show up the International chronicle steps of Inventory(IAS 2). First, we introduced the background of the IAS 2 then we discussed the major prerequisites of the standards and the importance of these desirements after that we critically evaluate the IAS 2.BackgroundThe IASs, International Accounting Standards, which issued with the IASC setting up in 1973, atomic number 18 the common standards followed by accountancy bodies. Then, the IASB with new accounting standards (IFRS) and much member countries was founded to replace the IASC. Both of the deuce committees concerned with the regulation improvement and global harmonisation of international accounting.Inventory military rank plays a life-sustaining role in the profit counting and assets evaluation process. However, method differences and contention facilitate exist in well-worn valuation among different companies. In legal injury of that, a consistent benchmark seems necessary to eliminate them and equal companies profit on the like basis. IAS 2 is such an international standard to offer regulation and method for catalogue. Its first draft of Valuation and intro of Inventories came out in 1974, and was brought into the IAS one year later. The former standard of breed (IAS 2(1993)) set up in 1993 and it took effect on the date of January initiatory 1995. Since IASB replaced of IASC, the modified version was published in 2003 and it took effect in 2005.Aiming to disturb the accurate calculation result of greet and subsequently expense of chronicle, IAS2 mainly concern with the write-d witness to Net Realizable Value. In order to divvy up make up to stocks, it provides cost principle as well. To be more specific, IAS2 classifies that the livestock accepts finished products, goods in process and raw material. Furthermore, it in like manner contains measurement of inven tory, total principle of IAS2, write-down to Net Realizable Value, expense recognition and the unavoidable disclosures as well.Requirements and importance of IAS 2There ar many requirements of the inventories in International Accounting Standard, in terms of IAS 2 regulate how to compendium the cost of inventories, how to measure inventories, how to assign inventories etc.The first requirement is that the cost of inventories is the total cost to deliver inventories to their present location and condition. According to IAS 2 (2005) cost of inventories shall comprise all be of purchase, costs of conversion and early(a) costs incurred in bringing the inventories to their present location and condition.The second requirement of IAS 2 is that inventories should be measured at the lower of net realisable treasure and cost on an item by item basis at once measured, the lower of net realisable assess and cost must be employ as an asset in the balance sheet. When the inventories ne t realizable rate below its cost, it means that the future economic benefits pass on less than its carrying amount, which are brought to the companies by inventories. Therefore this part of the loss should be deducted from the value of assets, and include in accounting subjects of current profit and loss. Otherwise, there leave be the phenomenon of virtual assets. Thus, we should use the lower of the net realisable value and cost in the stocktaking process.The third requirement of IAS 2 is that the cost of inventories should be charge by using the First-in First-out (FIFO) or weighted average cost form unless there are near special inventories. IAS 2 does not require that the fairest possible approximation to the cost should be reflected by the radiation diagram used. Therefore, the Standard bring ins the FIFO, as well as the weighted average cost principle for free choice. Accounting to Wikipedia (2009), FIFO is an abstraction ways of organizing and manipulation of entrop y relative to time and prioritization. This method describes the principle of what comes in first should be handled first, what comes in next waits until the first is finished. FIFO is the formula, which is frequently-used, to bear the cost of inventories which are out and which are take over in. Weighted average cost formula is easier than others, also when the market price rising up or locomote down, this formula is easy to calculate the average unit cost of inventories, in order to share the cost of inventory is more trade-offs and objective.OptionsIAS 2 offers some optional rules for companies to choose. These options, to a certain extent, affect the internationally implement of IAS. The future(a) essay will list three primary options.Firstly, IAS 2 stipulates two alternative formulas for measuring the cost of inventories, which are first in, first out (FIFO) and weighted average. FIFO assumes that goods sold are those produced earlier. That is to say, the cost of inventorie s is those produced later. This approach may lead to to a lower placeestimate cost and overestimate gross profit in the year of inflation. Weighted average is the average cost of all units shortly in stock at the time of reporting. (kcsi) IAS 2 is not needed for which formulas companies should choose. Obviously, these two optional formulas would measure different cost of inventories.Secondly, IAS 2 stipulates that ordinarily expenditure incurred is not recognized as cost of inventories. Nevertheless, IAS 2 supplies option of including some expense of inventories or not in the cost. For example, it is entrance that non-productive validatory expense could be part of the cost of inventories if they are for special projects. obscure from that borrowing cost of inventories could be included in the cost under special circumstances.Thirdly, there are two optional techniques in the inventories cost measurement, standard cost method and retail method. IAS 2 requests retail labor us e retail method to measuring the cost of inventories. However, other industry could contri thate either retail or standard cost method, which may result in discrepancy between companies that use different methods. applicabilityAt present, IAS 2 is widely implemented in Asia and Europe, while US GAAP plays a significant role in North America. This becomes a critical restriction factor of the applicability of IAS 2 internationally.Most stock exchanges in the world incline that quote companies should treat IAS 2 as financial report benchmark. It could improve the transparency and reliability of inventories information if listed companies apply IAS 2.Besides, more and more multinational corporations apply IAS 2 on their own, such as Air France, Nestle and Adidas. Owning to multinational corporations cook companies in more than one country, it would be convenient for nurture companies to consolidate statement if parent and subsidiary companies all implement IAS 2.Although IAS 2 has b een applied by more or less countries worldwide, during the process of applicability IAS 2 internationally, some deficiencies still have arisen inevitably. view as net realizable value as an example. IAS 2 prescribes it as the estimated selling price in the ordinary course of business less the estimated costs of end and the estimated costs necessary to make the sale(Birzeit Consulting). With regard to costs of completion and costs necessary to make the sale, IAS 2 does not list drive items, which implies lacking comparability between companies. The defects cause that some countries apply their own national accounting standard which are related to their national conditions.Opportunities for fictive accountingThe item inventory plays a significant role in companies operation and financial performance since it is not only determines the computation of profit, but also impacts the valuation of assets which displayed on the balance sheet. IAS 2 probably is a comprehensive guidance which prescribes systematic accounting treatments for inventory in terms of the determination of inventorys cost, the recognition of correlative expense, and the formulas for assigning costs to inventory. Despite the shyness of IAS 2, it is acknowledged that there are several stratagems for those unethical companies to manipulate their valuation of inventory, thereby expressing a fictitious favourable performance to the authorities and public.A study from Committee of Sponsoring Organizations of the Treadway Commission (COSO) described that there is no field of battle of accounting provides more opportunities for subjectivity and creative accounting than the valuation of inventory. much precisely, because of the close relationship between the inventories and revenues, companies often tend to inflate their revenues by overstating the value of inventories which is a direct and effective measure.There are a number of approaches to manipulate the value of inventory and those methods are mainly categorised into three aspects which are time horizon, NRV and overhead.Firstly, because IAS 2 do not have detailed guidance in respect of time dimension, companies usually give care to employ tricks at the end of monetary year by utilizing cut-off procedures. film that goods are delivered to a company at the last solar day of fiscal year 200X but the invoice date is at the first day of next fiscal year. In this situation, the company probably takes the goods into inventory outright but not records the purchase invoice. The premature recording of inventory leads to the self-moving increase of revenue which displays a false boost on the financial report. Furthermore, companies can falsify a transfer of non-existent inventory at the closing which is difficult to con tighten by auditors. Thus, the overstated value of inventory will generate from these fictitious in transit inventories.Secondly, IAS 2 adopted a specific method which is use the lower figure of net ste ady-going value and cost to measure inventory. This measurement concerned the true value of inventory in a large extent and let this valuation reflects the real market stamp downly on the other hand, it also provides opportunities for frauds because the calculation of NRV is largely depends on accountants anticipations. More specifically, it is obvious that the extent of provisions should be bowdlerise to NRV are highly subjective and manipulative. Just like Barry Elliott argued that a provision is an effective smoothing device and allows overcautious write-downs to be made in profitable years and consequent write-backs in unprofitable ones.Thirdly, although IAS 2 provides guidelines for allocating appropriate overhead into the cost of inventory, the distinctions between diverse of overhead are still hardly to be distinguished exactly. Companies might find opportunities of manipulation and include those overhead which indirectly attributable to achievement in the inventory valuat ion, thereby differing the influence of overhead and so rising profits.Weaknesses and ImprovementOverall, the statements about the inventory at the International Accounting Standards (IAS) are understandable and comprehensive. However, it seems that problems still patently exist in the inventory standards.Firstly, the calculation methods for the same industry are not unified. Although IAS2 has cancelled LIFO method, two different methods are still available FIFO and weighted average method. Different methods of calculation will produce different results. Thus, it makes no sense for the companies of the same industry to discriminate the ratio results. Therefore, the standard should be more detailed. First, it should select the most appropriate measurement based on the characteristics and nature of various industries. Second, it should be clear defined that all the companies in the same industry should adopt the same measurement method. These two measures help to eliminate differen ce, and subsequently to promote exploitation of harmonisation.Secondary, it offers the opportunities for creative accounting. There are many cases about listed companies involved in the stock fraud, and the most famous one is the U.S. Fallmos case. Its creativer Monas first get a pharmacy located in Ohio, and in the subsequent decades, he acquired another 299 stores, then he formulated a company called Fallmo. Unfortunately, all of these brilliants are fraud based on the overestimation of the inventory. Such a fraud ultimately led to the bankruptcy of Monash and his company as well. At the same time, the Big Five firm who provided audit services to it also lost millions of dollars. From these cases, it seems that fraud happened owing to the inadequate inventory steering system. In order to prevent companies from cheating by inventory, the standards should require the audit firm to check the companys inventories regularly.The third one is that the International Accounting Standards failed to keep gait with the times process. With the development of enterprises, it generates a lot of new inventory management methods, such as the Just-In-Time (JIT) method. JIT originated from Toyoda in Japan, it was created by Sakichi Toyoda, the founder of Toyota, his son Kiichiro Toyoda and the mastermind Taiichi Ohno. Toyota implemented the Kanban management which runs with the physical. For example, when an order which includes the requirements of the delivery time is proposed, Toyotas workers entered these information on the Kanban. The ordering department get the ordering information through Kanban and give the new order to the production department through Kanban, and so ahead all orders will be connected to the entire department. Aiming to eliminate waste, reduce costs and improve economic efficiency, its core is to seek a non-stock production system or to minimize inventory production system. In that case, it is the turn around order of the conventional mode which product first then face for customers. Although the demands of JIT are high, many companies have adopted this approach, such as dingle Inc. In the JIT, the zero inventory is the main goal. Thus, the traditional methods such as FIFO and weighted average method lost the meaning of their existence, and the traditional fields of the closing stock inventory system and the perpetual inventory system also appears to be meaningless.