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What is your opinion? Do you agree with the finance manager or any of his team members' suggestions?

They valued inventory at AED 7.52 million (23,500 unit X AED 320/ unit) in their SoP for the FY 2010. Market price for the product was AED 220/unit at closing date. When cost was analyzed it was found that due to economic recession the company remained unable to sell enough products to cover even their operational/production overheads. Finance Manager advised to reduce the inventory to their NRVs and charge the balance to Income statement. The debit treatment was advised by his team members as follow: 1.Julie :- charge the balance amount to "Cost of Sales" as these were operational/production overheads. 2.Pratab : - These should be charged to sales department as they could not sell the products. 3.Ali :- These should be considered as general expense or should be allocated to each reporting function on a fair basis. 4.Mark :- These are extra-ordinary expenses and shall not be treated as part of operations income/expense.

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Question added by Mohammad Ashfaq , Financial Controller , Union COOP
Date Posted: 2013/05/03
Deleted user
by Deleted user

Answer (1) Julie.
According to IAS 2, "The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs".
According to my understanding the expense mentioned here is COGS or Cost of sales.
But not sales or admin expenses.

Hassan Abbas awan
by Hassan Abbas awan , Senior Accountant , Green Valley premium hyper maket

Accorfing to IAS2 iventory should be measured at the lower of cost or NRV, in this case our NRV is low shot it should be recorded at NRV and difference should be charged to P&L. Julie is right and different should be charged to CGS, becaut it is related to core operations of the business

Shravan V G
by Shravan V G , Finance Manager , Alserkal & Assarain Concrete Products LLC

In according with the recognised accounting standards the same has to be charged expense.

But the same has to charged to General expenses, since does not qualify for extra ordinary expense if the production/ valuation accounting period differs or the same can be charged to COGS if the production/ and valuation pertains to same accounting period

mohamed afifi
by mohamed afifi , Financial and Administrative Manager , Egyptian Ministry of Education

I agree if his suggetions agree with  the legislations that rules the affairs in establishments 

Your company will record AED2.35 million write down as a loss, thereby decreasing inventory and increasing cost of goods sold. Also, this needs to be included net profit or loss for the period in which it arises.

Amir Ashrafi
by Amir Ashrafi , Sr. Project Manager , GOVERNMENT SERVICE INTEGRATION

Based on generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), inventory write-downs are recognized in a manner that reflects the loss's direct impact on the cost of sales. The loss from writing down the inventory to its net realizable value should be recognized in the income statement, therefore Julie is correct.

Winda Pebriana
by Winda Pebriana , Treasury & Collection Assistant Manager , PCP Express

Agree with Julie as Sales can not achieve the sales target

Rizwan Ahmad Butt
by Rizwan Ahmad Butt , Inventory Controller , Kot Addu Power Company Ltd

The company should book a loss charged to COGS with an amount AED. 2,350,000 (23500x100), so advice no. 1 of Ms. Julie is absolutely right.

Muhammad Aslam Moten Moten
by Muhammad Aslam Moten Moten , Manager Account , Safa Textile

I am not in Examination Hall

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