Inventory Accounting and Reporting
Objective The objective is to outline accounting and reporting requirements for inventories.
Authority The Financial Administration Act, 1993, section 15 requires the General Revenue Fund financial statements be prepared by the Provincial Comptroller in accordance with the accounting policies established by Treasury Board.
Background Inventories are a significant economic resource managed by
governments and a key component in the delivery of many services and programs. There are two main types of inventory. They are Inventories Held for Consumption or Use and Inventories Held for Resale.
Most of the Province’s inventories are held for consumption or use and include diverse categories such as equipment maintenance and airplane parts, lab supplies and vaccines, pastures maintenance supplies, fire-fighting equipment, park maintenance supplies and aggregate supplies. Accurate accounting and reporting of inventories is essential for governments. Information about inventories is useful for
understanding and assessing a government's accountability for and management of its asset base and future requirements for replacement. Inventories form part of a government’s financial position because they provide economic resources, normally in the form of unconsumed service potential, that a government can employ in the future to
accomplish its objectives.
Definitions Cost is the amount of consideration given up to acquire, construct or develop inventories, and includes all costs directly attributable to acquisition, construction or development.
Inventories represent items that are purchased or produced and are not immediately consumed. They are recorded as an asset until they are issued for consumption or sale, at which time they are expensed. There are two main types of inventories: Inventories Held for Consumption or Use and Inventories Held for Resale.
Inventories Held for Consumption or Use are non-financial assets that will be used or consumed in the normal course of operations. Because the primary purpose of a government’s operations is to provide services, the future economic benefit of inventories held for
consumption or use is embodied in their capacity to render service that furthers the government’s objectives. They are not intended for sale in the ordinary course of operations.
Inventories Held for Resale are financial assets that will be sold or used to produce a product that will be sold in the ordinary course of operations.
Threshold is the minimum cost an individual category of inventory must have before it is recorded as an asset on the Province’s statement of financial position. Thresholds are applied on a
category-by-category basis individually by ministry.
Treasury Board Policy .01 Treasury Board requires ministries to follow the recommended accounting policy of the Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants (CICA) of recording inventory as an asset on the statement of financial position and expensing the use or consumption of inventory on the statement of operations.
.02 Each ministry is responsible to maintain accounting records and prepare reports for inventories as prescribed by the Provincial Comptroller.
.03 This policy is effective April 1, 2004.
Provincial Comptroller .04 These requirements apply to the General Revenue Fund (GRF)
Directives and revolving funds.
.05 Accounting policies may change from time to time. These changes are communicated through notifications from the
Provincial Comptroller and the
apply them to ministry transactions.
Ministry .06 Ministries are required to:
Responsibilities
• acquire and manage inventories to provide effective, efficient and economical program delivery;
• establish and maintain accounting systems to collect, record and report information on their inventories; and
• establish and maintain adequate internal control systems to ensure the accuracy and reliability of inventory information and reports.
Inventory Categories .07 Inventories should be assigned to the appropriate categories
based on their nature and characteristics.
.08 Where ministries are uncertain as to which category an
inventory belongs or where no appropriate category exists, they should contact the ministry Executive Director/ Director of Administration who may consult with the Executive Director, Financial Management Branch (FMB), Provincial
Comptroller’s Office, Ministry of Finance.
Held for Consumption .09 The following describes the types of items to include in each
or Use category of inventory held for consumption or use:
• Equipment Maintenance, Airplane Parts and Other Supplies - includes the entire inventory required to maintain equipment, airplanes and other capital assets included in heavy equipment, operating equipment, vehicles, aircraft, bridges, ferries – vessels and towers and buildings and related equipment. This category includes items such as replacement parts, fuel, grease, oil, bridge timbers, signs, building material, and parts for security systems, heating, ventilation and air conditioning systems and building operations.
• Lab Supplies and Vaccines - includes water bottles, gases, chemicals, reagents, general lab supplies and vaccines.
• Pastures Maintenance Supplies - includes fence posts, wire, feed, lubricants and other items used to maintain the pastures.
• Fire-fighting Equipment - includes all of the general equipment used to fight forest fires, including such items as stoves, tents, hoses, shovels, water bladders and fuel.
• Park Maintenance Supplies - includes firewood and park equipment maintenance supplies held in the government-managed parks.
• Aggregate - includes gravel, seal and base aggregate and asphalt mix used for highway maintenance.
• Inventory for Distribution - includes office, janitorial and other supplies purchased by the Ministry of Central Services for distribution primarily to other ministries.
Held for Resale .10 Inventories for resale include items that will be sold or used to produce a product that will be sold in the ordinary course of operations. They are recorded as financial assets. Ministries should advise the Provincial Comptroller of categories of inventory held for resale.
Excluded Inventories .11 The following inventory categories are excluded from this
policy. All items in these categories should be expensed when purchased:
• office supplies (pens, paper, pencils, post-its);
• institutional supplies (food, medicine, linens and health clinic supplies);
• election readiness (forms, maps, booklets, pens, paper, clipboards, buttons, ballot paper); and
• other highway maintenance (salt and calcium, culverts, paint, and asphalt).
Cost .12 Inventories should be recorded at cost.
.13 The cost of inventory includes the purchase price of the inventory items and other acquisition costs such as shipping and handling charges, insurance costs and duties.
.14 The method selected for determining cost should be one that results in the fairest matching of costs with program delivery activity.
.15 Several common methodologies used to determine cost are:
• Specific identification – the cost of each item in the inventory is identified on an item-by-item basis;
• Average cost – the cost of an item is determined from the weighted average of the cost of similar items purchased during the year; and
• First in first out – the cost of the first items purchased is the cost assigned to the first goods sold or consumed.
Thresholds .16 A threshold represents the minimum cost an individual
category of inventory must have before it is to be recorded on the statement of financial position.
.17 A threshold of $100,000 per category should be applied on a ministry-by-ministry basis.
.18 Inventories that meet the definition of inventory but are under the threshold should be expensed in the year in which they are purchased.
.19 Ministries or revolving funds may choose a lower threshold for recording inventories held for resale.
Capitalized Inventories .20 Inventories should be capitalized when they are a direct cost of
a constructed or developed asset.
Write-downs .21 Inventories held for consumption or use should be written
down when a reduction in the value of their service potential can be measured and the reduction is expected to be
permanent.
.22 Inventories held for resale should be written down when their net realizable value is less than their cost and the reduction is expected to be permanent.
.23 Ministries may need to consider a write-down where they hold obsolete inventory, slow moving inventory or damaged items, or when inventory levels are expected to be surplus to needs. .24 All write-downs should be approved by the permanent head or
delegate. Documentation for write-downs should be submitted to the Provincial Comptroller for review.
.25 Write-downs of inventory should be accounted for as an expense of the current period.
.26 Generally, a write-down should not be reversed.
Donated Inventories .27 If inventory is donated to the Government, the cost is its fair
value at the date of contribution. Fair value of donated inventory may be estimated using market or appraised value. Refer to
Budgeting .28 Ministries are required to appropriate funds for inventory
purchases. Any significant changes in the value of inventories and write-downs should be budgeted for and displayed in the Estimates.
Accounting and .29 Each ministry is responsible for recording transactions for
system, maintaining a supporting detailed subsidiary ledger and reporting inventory information to the Provincial Comptroller as requested.
.30 Inventory purchases are charged to an appropriation and are initially expensed. Inventory items returned in the same year they are purchased should be recorded as refunds to vote in
accordance with
items returned in subsequent years should be recorded as refunds - previous years’ expenses.
.31 The change in inventory account is used to adjust the inventory balance without affecting spending control. Balances in this account are included in the statement of operations. All adjustments to inventory are recorded through the change in inventory account including the following:
• Increases in inventory:
• the initial recording of new inventory; and
• purchases.
• Decreases in inventory:
• inventory usage;
• inventory returns; and
• write-downs.
Refer to Schedule A for examples of transactions and the appropriate accounting for them.
.32 Ministries are responsible for maintaining source documents, working papers and files supporting inventory transactions for internal and external audit and review.
.33 Each ministry should maintain an inventory subsidiary ledger which substantiates and is in agreement with the ministry’s inventory information recorded in the Government’s central financial system.
.34 Ministries should at least annually agree the cost information in the subsidiary ledger to the inventory balance recorded in the central financial system. Any differences should be followed up and any required accounting entries made.
.35 Ministries should maintain sufficient information in their subsidiary ledgers to meet reporting and internal control requirements.
.36 For each fiscal year, ministries must report a total amount, by inventory category, for each of the following for the current and prior years:
• opening cost;
• changes during the year;
• the amount of any write-downs during the year; and
• closing cost.
.37 To enable the Provincial Comptroller to meet reporting requirements, ministries are annually required to report their inventory information as outlined in th
Exemption from .38 Where a ministry believes that any of the requirements set
Requirements out in this directive are inappropriate for the ministry or a
revolving fund under its administration, the ministry may submit a written request to the Provincial Comptroller for an exemption. The request should outline the reasons why the requirements are not suitable and include a plan that would be more appropriate.
.39 The Provincial Comptroller will advise the ministry of the decision in writing.
Further Information .40 Questions regarding inventory accounting and reporting may
be directed to the ministry Executive Director/Director of Administration who may consult with the Executive Director, FMB. References
CICA Public Sector Accounting Handbook, PS 1200 – Financial Statement Presentation
Schedule A
Illustrative Entries
Thresholds (paragraphs 2160.16 to 2160.19)
1. Ministry X reviews its records of lab supplies and vaccines at year-end and determines the cost is $1.3 million. This is a new category of inventory for the Ministry and has never been recorded before.
Debit Credit Lab Supplies and Vaccines Inventory $1,300,000
Change in Inventory Held for Consumption or Use $1,300,000 - initial recording of inventory
2. Ministry X reviews its records of equipment maintenance at year-end and determines the cost is $90,000. This category of inventory had previously been recorded at $110,000.
Debit Credit Change in Inventory Held for Consumption or Use $110,000
Equipment Maintenance, Airplane Parts and Other
Supplies Inventory $110,000
- record change in inventory (remove the inventory as it is now under the threshold) 3. Ministry X reviews its records of equipment maintenance at year-end and determines the cost
is $4 million. This category of inventory had previously been recorded at $3.5 million. Debit Credit Equipment Maintenance, Airplane Parts and Other
Supplies Inventory $500,000
Change in Inventory Held for Consumption or Use $500,000 - record change in inventory
Write-down (paragraphs 2160.21 to 2160.26)
4. In July, Ministry X reviewed its inventory of Lab Supplies and Vaccines. Staff determined that a shipment of glass beakers purchased last year worth $24,000 is missing. This
inventory category is currently recorded by the Ministry at $2.8 million.
Debit Credit Change in Inventory Held for Consumption or Use $24,000
Lab Supplies and Vaccines Inventory $24,000 - record write-down of inventory and report to the Provincial Comptroller
5. Ministry X purchases new pumps for forest fire fighting. As a result, none of the hoses currently recorded in inventory fit and they have no other use to the Ministry. The old hoses have a cost of $78,000.
Debit Credit Change in Inventory Held for Consumption or Use $78,000
Fire-fighting Equipment Inventory $78,000 - record write-down of inventory
Acquiring Inventory (paragraph 2160.30)
6. Ministry X purchases replacement parts and oil for the maintenance of its vehicle fleet for $27,000. Their inventory of equipment maintenance items is currently recorded at $2.2 million.
Debit Credit Repairs and Maintenance Expense $27,000
Accounts Payable $27,000
- record purchase
Excluded Inventory (paragraph 2160.11)
7. Ministry X reviews its records of stationery at year-end and determines the cost is $121,000. No entry required. Office supplies are expensed when purchased and not recorded as inventory.
Inventory Returns (paragraphs 2160.30)
8. In November, Ministry X determines that equipment with a cost of $100,000, that was purchased and set up as inventory in October, is defective and returns the equipment for a refund.
Debit Credit
Accounts Receivable $100,000
Repairs and Maintenance Expense $100,000
- a debit memo records the refund to vote (to the same account used to record the original expense)
At the same time, or as part of a journal entry to record other changes to inventory, the inventory balance is updated for the return:
Change in Inventory Held for Consumption or Use $100,000 Equipment Maintenance, Airplane Parts and Other
Supplies Inventory $100,000
- record change in inventory
9. In May, Ministry X determines that an airplane part with a cost of $45,000, that was purchased and set up as inventory in the previous fiscal year, is defective and returns the airplane part for a refund.
The accounts receivable, refund and change in inventory can be recorded as one journal entry, or the change in inventory can be recorded separately as part of the normal process to adjust inventory:
Debit Credit
Accounts Receivable $45,000
Refunds – Previous Years’ Expenses $45,000 - record the refund without affecting the current year appropriation
Change in Inventory Held for Consumption or Use $45,000 Equipment Maintenance, Airplane Parts and Other
Supplies Inventory $45,000