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  • Valuation of Customer Hedged Inventory

    by Rahul on Tuesday, July 12, 2016 at 03:52 PM

    We are working on Job work basis. Under this we charged fixed amount for Job work from our customers. But for our customer we procure precious metal directly at customer agreed price and when we invoice then sale price include agreed price of metal. Query is if we have precious metal lying as inventory on 31st March, then whether we need to Revalue such inventory on the basis of Cost vs Net realisable value. OR we should value inventory on the customer agreed price because risk is on customer.

    Replied byEditorial Board Wednesday, November 30, 2016 at 03:00 PM

    It is presumed that the precious metal is inventory of your entity and satisfies the definition of inventory as per AS 2 ‘Valuation of inventory’.

    As per AS 2, inventory should be valued at cost or net realisable value, whichever is less. In case the sales is firm or the price of sales has been agreed with the customer then the net realisable value of such inventory is the firm price/ contract price.

    However, there is no exception to the rule of cost or NRV, whichever is less.

    Relevant extracts from AS 2

    Para 23 - Estimates of net realisable value also take into consideration the purpose for which the inventory is held. For example, the net realisable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, the net realisable value of the excess inventory is based on general selling prices. Contingent losses on firm sales contracts in excess of inventory quantities held and contingent losses on firm purchase contracts are dealt with in accordance with the principles enunciated in Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date.

    Para 24 - Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realisable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value.

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