The introduction of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) ushered in more disclosure requirements in an entity’s financial statements. Oftentimes, additional narrative explanation are required for a particular note item in the Notes to Financial Statements. Transparency in financial reporting, you say, huh.
IAS 2, Inventories, in particular, requires a company to disclose among others, the accounting policies adopted in measuring inventories, the carrying amount of inventories carried at cost and the carrying amount of inventories carried at net realizable value.
Complexities, however, arise when a company allocates a provision for inventories specifically identified as obsolete or are impaired, and in such a case are measured at net realizable values. Generalizing in the notes that “Inventories are stated at net realizable value,” (when in fact only a few distinguished items are affected) cast a serious hassle on the part of the reporting entity.
If you take this statement to layman user of the financial statements (FS), who at the same time can be an investor or a prospective investor, the first question will be what’s the definition of “net realizable value” or NRV. Quoting IAS 2 paragraph 4:
Net realizable value is 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.
If I were the user of this particular FS, from that finical disclosure regarding inventory alone, I’m going to have this impression that the company is not making any profit at all.
Inventories are stated at net realizable values, it means to me that the enterprise can only be able to sell its products at particularly lower than the cost to produce and sell those products. The company as a whole doesn’t sound to be a good investment.
I don’t know, that statement just doesn’t sound so good. Masakit sa tenga pakinggan.
If you’re not yet convinced, just try listening to Joel Dizo say: