A charity worker wonders about a change in accounting treatment for entities.
Charitable distributions
Q. I work for a charity holding inventories held for distribution. As a consequence of the amendments mandated by Amending Standard AASB 2007-5 Amendments to Australian Accounting Standard:Inventories held for distribution by not-for-profit entities [AASB 102], will there be a change in the accounting treatment relating to inventories held for distribution for the annual reporting period commencing 1 July 2007?
A. While the amendments are applicable to not-for-profit entities, there will be no mandatory change in the accounting treatment for inventories held for distribution.
However, there is an additional disclosure requirement. AASB 102 Inventories paragraph Aus36.1 includes an inserted subparagraph (h), which requires the disclosure of the basis or bases (when more than one basis is used) on which any loss of service potential of inventories held for distribution is assessed. Where there is no change in the accounting treatment ('Charity A' continues with the 'lower of cost and current replacement cost' measurement basis), that basis shall be disclosed.
However, AASB 2007-5 has provided additional options for not-for-profit reporting entities to account for inventories held for distribution. The measurement basis, cost adjusted when applicable for any loss of service potential, replaces the 'lower of cost and current replacement cost' measurement basis. Though a loss of service potential is not defined in AASB 102, AASB 102 paragraph Aus9.2 provides two examples of loss of service potential. They are: when current replacement cost is lower than the original acquisition cost or subsequent carrying amount, or a loss of operating capacity due to obsolescence.
Example 1 represents the same measurement basis. Hence a loss of service potential may be determined from the difference between the lower current replacement cost and its higher carrying amount. Example 2 arises when the item has been held, usually for an extended period. Consequently, a loss of operating capacity may occur because of technical or physical obsolescence. The loss of service potential may be ascertained based on an appropriate determination. The revised AASB 102 does not specify the methodology to be applied to determine the loss of service potential.
However, it stipulates that different bases may apply to different inventories held for distribution within the same entity. Consequently, it is essential to provide appropriate disclosures as required by AASB 102 paragraph Aus 36.1 subparagraph (h).
Answered by John Ngiam CPA, CPA Australia's financial reporting and governance policy adviser.
