Latest IFRIC agenda decisions – Costs necessary to sell inventories & non-going concern financial statements

 

IFRS Interpretations Committee (the Committee) agenda decisions are those issues that the Committee decided not to take onto its agenda. Although not authoritative guidance, in practice they are regarded as being highly persuasive, and all entities reporting under IFRS should be aware of these decisions because they could impact the way particular transactions and balances are accounted for.

At its June 2021 meeting, the IFRS Interpretations Committee (Committee) issued two final agenda decisions which are summarised below:

Issue 1: Costs necessary to sell inventories

 
Fact pattern

‘Net realisable value’ (NRV) of inventories in IAS 2 Inventories is defined as (emphasis added):

        “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”

IAS 2, paragraphs 28-33 include requirements about how NRV is estimated, but do not identify which costs are ‘necessary to make the sale.
Question:
Should all costs necessary to make the sale be deducted when estimating NRV, or just those that are incremental to the sale?
Rationale for agenda decision: IAS 2, paragraph 28
  • IAS 2, paragraph 28 notes that the objective of writing inventories down to NRV is to avoid inventories being carried in excess of amounts expected to be realised from their sale.
  • The requirement to estimate costs ‘necessary to make the sale’ means that entities therefore cannot limit such costs to only incremental costs because to do so would not achieve the objective set out above.
Conclusion:

When determining NRV of inventories, Entities must estimate all costs necessary to make the sale in the ordinary course of business. An entity must use judgement to determine which costs are necessary to make the sale, considering its specific facts and circumstances, including the nature of the inventories.

The Committee decided not to add a standard-setting project to its work plan because it concluded that the principles and requirements in IFRS provide an adequate basis for an entity to determine whether the estimated ‘costs necessary to make the sale’ are limited to incremental costs when determining NRV.

Issue 2: Preparation of financial statements when an entity is no longer a going concern

 
Fact pattern A

During the current reporting period, Entity A determines that it is no longer a going concern and will therefore not prepare its current period financial statements on a going concern basis.

Entity A was a going concern in the prior reporting period but has not yet prepared financial statements for that prior period.
Question:
Can Entity A prepare its prior period financial statements on a going concern basis if it had not previously prepared financial statements for the prior period?
Rationale for agenda decision: IAS 10, paragraph 14
  • An entity shall not prepare financial statements on a going concern basis if management determines after the reporting period that it intends either to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.
Conclusion:

An entity that is no longer a going concern cannot prepare financial statements on a going concern basis (including those of prior periods that have not yet been authorised for issue).

The Committee concluded that the principles and requirements in IFRS provide an adequate basis for an entity that is no longer a going concern to determine whether it prepares its financial statements on a going concern basis.

 

Fact pattern B

During the current reporting period, Entity A determines that it is no longer a going concern and will therefore not prepare its current period financial statements on a going concern basis.

Entity A was a going concern in the prior reporting period and previously issued financial statements prepared on the going concern basis.
Question:
When preparing the current period financial statements, must Entity A restate comparative information to reflect the basis of accounting used in the current period financial statements (i.e., not a going concern)?
Rationale for agenda decision:
  • None provided by the Committee.
Conclusion:

Based on its research, the Committee observed no diversity in practice and did not obtain evidence that the matter had widespread effect. That is, of the entities observed, none had restated their comparatives to be on a non-going concern basis.

The Committee therefore decided not to add a standard-setting project to its work plan.

 

For more on the above, please contact your local BDO Representative.

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