N R V ??? which price is to be taken??

[smraza]

Suppose I had a certain stock of finished goods at balance sheet date,
my stock valuation policy is "Lower of average cost and NRV",
and movement of stock is on FIFO basis (due to the nature of business)
i have gross loss during the year, it means my cost is greater than my selling price or NRV (here selling expenses are not significant hence ignored)
now i will have to value my stock on NRV.
suppose I had 1000 M.Tons stock of F.G. and up to the date of initial of accounts i have made 5000 M.tons Sales. (which means my stock has wiped out) now the prices are going up, (recent prices)
now my auditor is insisting me to value to stock on most recent price,
i m telling him that I have sold my stock on low price that was the NRV for that 1000 M.Tons, what i m supposed to do ?????
can anybody guide me on that?????? kindly give refernces.
Regards

S M R

[smraza]

I think i should do whatever my auditor is saying <img src=icon_smile_big.gif border=0 align=middle>

S M R

[zubair]

Hi
under the circumstances, am I correct in saying that

Stock is to be valued on the lower of
1 cost or
2 NRV

do we agree on this point.
Thanks
zubair

[smraza]

Yes, you are right, as this is the policy of my company,
but my question is which price I m supposed to take??? the price on which i have sold the stock or the price which is most recent to the initialing of accounts by auditors ?????

S M R

[Pervez]

"Suppose I had 1000 M.Tons stock of F.G. and up to the date of initial of accounts i have made 5000 M.tons Sales. (which means my stock has wiped out0"

Hi Raza!

The above statement is pretty confusing! You had 1000 M. Tons of stock at what time? Start of the period or end of the accounting period? If your stock at end of the period is wiped out, how the problem of valuation at balance sheet arises? You don't have any stock!!

Any way i assume you have stock at the date of balane sheet. Here the basic principle of reporting comes into play. Balance Sheet always represent the financial position of the company <b> at a particular date</b>. Therefore, you should use the NRV at the balance sheet date. If no sales occured at the balance sheet date, then the most recent NRV to balance sheet date.

Remember IAS 2 state that if the cost is higher than NRV (Which is defined as price obtained in ordinary course of business less cost of completion (in your case you said selling costs are not an issue). Therefore, if this is the case, a reduction to NRV need to be done and the difference is recognized as expense in the period the reduction occured.

Conclusion Your auditor is smart and guess what he is right too!

Take care

<b></b>



Edited by - Pervez on Nov 02 2003 031447 AM

Edited by - Pervez on Nov 02 2003 032324 AM

[zubair]

Well, I believe your auditor is correct. In drawing up the financial statements care is needed to ensure that the correct valuation of the stock is passed on to the readers of financial statements. The last avaliable selling price might not be appropriate as they might not materialise in the future. under the circumstances, your auditors are correct.
Please let me know if you need a reference from the standard.
thanks
zubair

[Pervez]

Hi Zubair!

You r right in saying that the last available is not the most approriate price but your reasonsing that it may not materialize in future is incorrect. If you held accountant responsible for ascertaining future price of inventories, it is an undue burden. The body of GAAPs does not support this approach. In theory at least, the inventories may not sale for next 5 years, so should we worry about what the valuations be 5 years from know. (Sometimes inventories are held for long period of time i.e. wine industry (the older the wine, more valuable it is)

Therefore for illustration purporses, if there is a general agreement in a country that inflation will be 10% next year, would u inflate your values by 10%? Accountants work on principle of conservitism (hence lower of cost or NRV not higher of cost or NRV). The events occuring in future affecting the valuation at balance sheet date should not be the concern of accountant. These will be reflected in future financial statements when they occur and affect the valuations.

Regards.




Edited by - Pervez on Nov 02 2003 041042 AM

[zubair]

Hi
I agree with pervez in principle.

However, the situation under consideration was different and needs a differnt approach the company incurred losses. hence cost is greater than NRV. IF cost is greater than NRV then NRV is the appropriate valuation policy and is a disclosable matter in the accounting policy note.

Wine example Value of wine increase with time, therefore, NRV is greater than the cost. Hence cost is taken as that valuation. ie, unrealised gains are not administered. but the standard clearly says if there are unrealised losses, they are administered as soon as we become aware of them and the existance of losses is a wake up call. Even in wine if there is a sudden downturn in market say, i mean just as an example, if it is discovered that all the wine in the world is contaimnated, then wine is not salable item, cost is greater then NRV and hence NRV (based on future selling price) is taken as basis of valuation. hope it clears the matter.


To be quite honest, there is nothing in your message that I disagree with but the scanerio under discussion was different due to the existance of losses.
Thanks
zubair



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[Pervez]

Hi Zubair!

^I don't disagree with the principle that if NRV is lower than cost, we should use it as proper valuation. That is undisputed. My question was what value should it reflect? I was asserting that it should reflect the net value realizable at the balance sheet date rather than a past or a future realizable value. NRV is by its definition an estimate (you are determining value of a good that is not sold as yet). Therefore, you have to go with an assumed price(unless the co has a firm agreement and price is established in it). But it is the timing of estimate which is concern of mine. It should be NRV at balance sheet date not a future date when goods will actually be disposed off.

By the way Raza, since u have already decided to go with ur auditor, does this discussion matter to u or is it just an academic excercise?

Take care

[smraza]

thanx pervez and zubair,
Yes I did according to my auditor, but i need clearance on that,
actually my questions was that i have stock of 1000 M.T. on June 30, 2003, and up to initialling of accounts i.e. Sept.30, 2003 i have made sale of 5000 M.Tons. as i issue my stock on FIFO basis so my stock wiped out.
as I have gross during the year ended June 30, 2003. so my NRV will be lower than my Cost. so as per my policy i have to value the stock at NRV.and i m ready to do so.
but i m confused on one thing, in my opinion I should take that price on which i have actually sold my stock, i.e. with the that 5000 M.tons,
but my auditor says, you must take the price recent to the Initial date, as i have made sale @ Rs.4,000 Per MTon, (which is actual Net Realized Value)
by my auditor Says you should value the stock @ Rs.5,000/- per M.Ton which is most recent price.
I told him why should i overstate my stock by Rs.1,000/- per M.Ton.
He says I dont know <img src=icon_smile_big.gif border=0 align=middle>, you have to value the stock at most recent price.
I dont care about the effect of valuation, but I m confused about the method of valuation.
I hope this will clear my question and confusion.

S M R

[zubair]

Hi Pervaz rathat
AOA Pervez

we agree principl and disclouse and I also agree that NRV is on balance sheet date.... it is generally assumed and understood that NRV term is always used at the balance sheet date.... so you compare the NRV (at balance sheet date) with the historic cost and take the lower to F/S. I agree.

For Raza
You asked for a reference, are you ok on that or you still need the reference.
Thanks
zubair

[zubair]

final note.

Pervez in the wine example NRV(future expected price) = Nil
ie under the scaneiro the price would continually to fall to nil and then it would become a laiblity to keep the stock. therefore, If i am faced with this problem, i will insist that whatever is the NRV (At balanace sheet date) it has no value since the stock is contaimnated and the provison for obsolete stock shoud be provided to make it nil,,, plz. refer to standard on post balance sheet events, which says if the auditor becomes aware of a such a problem and the finacial statements are not issued, adjustments are mandatory without andy if or but, and if i am not mistaken it also says that if the statements are already issued but AGM is not held, auditor should consider a motion in AGM, I am pretty sure about that, thought I didnot ever exercise it. As an auditor you might take a different view, well i welcome that. but i am only worried about the monitoring visit for my audit, and I dont think they would like it very much that I had the info. that Sotck is going to be nil, yet I allowed a valuation.... I would not take the risk,,,,plenty of standards to backup the treatments including prudence and PBSE.

however, normally NRV (is at balance sheet date only), but the wine example was a different case.
Thanks
zubair

[smraza]

<BLOCKQUOTE id=quote><font size=1 face="Verdana" id=quote>quote<hr height=1 noshade id=quote>For Raza
You asked for a reference, are you ok on that or you still need the reference.<hr height=1 noshade id=quote></BLOCKQUOTE id=quote></font id=quote><font face="Verdana" size=2 id=quote>
Dear Zubair,
I m still confused, (dont mind) as my question is still unanswered, I dont need reference as IAS 2 is itself clear on that,
I need clarification regarding
Which rate should i take for valuation of stock ??
1. the rate on which I have actually sold my stock after balance sheet date? (following the IAS 10 "Events after balance sheet date")
2. the rate which is near to the Issue of financial statements (as insisted by auditor).

Regards

S M R

[Pervez]

Hi Zubair and Raza!

Good Zubair that we are on same wave length. I wonder if we went to same school!!!

Raza, your most recent post does explain the facts more clearly. Unfortunately, IAS 10 also support the view of ur auditor (if he cann't explain the rationale behind his opinion, classify it as "Teer or Tuka").

Now IAS 10 has situations which require us to adjust the b/s date amounts or not to adjust.

If an event occur that gives evidence of condition that existed at the balance sheet date, adjusting is required.
If an event occur that gives evidence of condition that arose after the balance sheet date, adjustment should not be made to b/s values.

Your sale price after the date of b/s doesn't give evidence or support to the conditions that existed at b/s date. It gives evidence of conditions that arose after the b/s date.
If it does give evidence of former, tell me how? and i will concur with you. Therefore, price subsequent to b/s date is not adjusting event.

Take care.

[zubair]

For Raza
it is difficult to ascertain as to why your auditor insisted on the treatment, he could have gone for the other treatment you suggested. Its not one standard that affects the stock valuation, its a sequence of standards including, prudence, PBSE, stock valuation and going concern. Most importantly, auditors also tend to take into consideration other factors eg managment representations (directors wishes),,,, so try to ascertain yourself as to why he has gone for this specific treatment. the other treatment you suggested in line with IAS 10 appears to be a better one. but in the absence of financial statements and related information, we cant comment. he must have made the right choice. try discussing this with him and draw his attention to your views and see what does he say.

Pervez
I think you are applying the standards your own way and coming to a different professional judgement, I tend to look at the things differently,.... there is no right or wrong answer,,, it depends whether or not we can convince the quality review guys of our point of view.

The answer to your post and pre exisiting conditions is that it can again be aruged either way. since its an assumed situaiton,,I have to make a lot of assumptions to come to the conclusion as to which one of the four grids this event falls in. I think we leave it there.

I must say that AUditing is highly fluid these days. its quite difficult to make judgements that suit the wishes of managemnet and also have the capacity to withstand in the courts or monitoring units.

Anyway, nice talking to you and SMR on this subject...and good that we all kept our cool......
Thanks
zubair