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I tried to answer the question “Section B – 3(a) – Exam December 2018 “ and I need your help because honestly I have not understood the answer (maybe it is just my misunderstanding or It is not so clear how the NRV is calculated for inventories)
The part (i) of the question about the Conceptual Framework should be clear. There are two measurement basis historical cost and current value which include the NRV. The Conceptual Framework is not an accounting standard and so the NRV will be calculated according to the IAS 2 (as we apply Conceptual Framework when there is no an accounting standard for a particular transaction but this is not our case).
Then we say that “the year-end spot price will provide good evidence of the realisable value of the inventories and where the company has an executory contract to sell coal at a future date, then the use of the forward contract price may be appropriate”.
I think that this can be used for all inventories categories excluded the coal with a low carbon content. But here I start being a bit confused. What does it mean executory contract? And why then the answer say “However, if the contract is not executory but is a financial instrument under IFRS 9 Financial Instruments or an onerous contract recognised as a provision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, it is unlikely to be used to calculate NRV”. Shouldn’t these contracts also if executory be booked in accordance with IFRS 9? If not, can you give me some example of executory and not executory contracts? And when should these contracts be booked in accordance with IAS37? (this is unclear). Can you please give me some examples here too or example when they follow under IAS37?Then the answer says “Fill should calculate the NRV of the low carbon coal using the forecast market price based upon when the inventory is expected to be processed and realised.” Here I am confused again. The NRV is calculated on the basis of conditions which existed at the date of the statement of financial position or in 3 years time as the goods won’t be sold before? I mean we should use the NRV at 30 November 20X6 or the NRV in 3 years-time so 30 November 20X9? (our forecast is in 3 years time).
Then we will apply IAS8 because the adjustments in NRV from now to the sale is a change in estimate. Is my understanding correct?I hope my questions are clear.
Thanks1. If the inventory is to be sold for cash we will use the selling price at the balance sheet date
2. If I have already agrees to sell the inventory to a specific customer At an agreed future date Then I may need to take account of expected future price changes. This is an executory contract. If the contract is expected to be at a massive loss I may have to set up a provision
3. If I enter into a derivative forward contract Which will be settled in cash not inventory Then I am dealing with the financial instrument Which will be measured at fair valueHope this makes sense
It’s a very difficult questionThanks. Yes, it makes sense and now it is clearer than before. Just last question.
So for the low carbon coal is valued at the NRV of 30 November 20X6 (so the date of the statement of financial position) and in the coming years if there is an adjustment to the NRV before the sale, this will be booked in accordance with IAS 8.is my understanding correct?
Thanks a lot once again,
regards,
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