This guide in Excel contains an exercise to recognize the deterioration of inventories of an SME due to an abrupt decrease in the sale price. This calculation is essential in the accounting closing process.
In addition, we will explain how to account for and recognize such impairment in the income statement.
Impairment of inventories in the accounting closing process in an SME
In order to calculate inventory impairment, certain variables must be taken into account, such as, for example, sales prices and the expected sale of inventories.
This exercise in Excel exposes the case of an SME that manufactures parts for sports machinery and presents a fall in the sale prices of three different references, which represents a deterioration of inventories.
To assess such impairment, the entity must calculate the net realizable value and compare it with its carrying amount for each inventory item.
It should be noted that the cost of inventories is only adjusted when the net realizable value is less than the book value. Therefore, when it is greater, no adjustment should be made; however, if there is inventory impairment, it must be accounted for and recognized in the income statement.
Net value of realization
The net realizable value –VNR– is the estimated sale price of the inventories on the closing date less the costs of completion and sale. For his part, the book value of inventories It is made up of the acquisition cost plus transformation costs and other directly attributable costs.
The Standard for SMEs states in paragraph 27.2 that:
An entity shall assess at each reporting date whether inventories have been impaired. The entity makes the assessment by comparing the carrying amount of each inventory item (or group of similar items) with its selling price less costs to complete and sell.
These standards seek to bring the value of the items closer to reality, which is why the recognition of the value of the assets implies measuring the deterioration suffered by the assets. inventories.
The inventory deterioration It can occur for various reasons, for example:
- Existence of damaged inventories.
- Existence of partially or totally obsolete inventories.
- Fall in market prices.
- Increase in the estimated costs for its completion or sale.
Similarly, paragraph 27.4 of the Standard for SMEs states that the entity must reverse the impairment of inventories when the circumstances that gave rise to this recognition have ceased to exist, performing a new evaluation in a later period.
Finally, we invite you to watch the following video, in which Dr. Juan Fernando Mejía, a specialist in International Standards and taxes and a speaker at Actualícese, clarifies the accounting and tax treatment of the decrease in inventories due to breakdowns.
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