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IAS 16 — Core inventories

Date recorded:

The IFRS Interpretations Committee (“the Committee”) received a request to clarify the accounting for ‘core inventories’.  The issue was whether core inventories should be accounted for under IAS 2 or IAS 16.  The Committee discussed the issue at its March 2014 meeting and tentatively decided to develop an interpretation to address the existing diversity in practice. The Committee noted that they believed the interpretation should refer to core inventories as ‘minimum fill’, as the term ‘core inventories’ is sometimes used to describe fact patterns that differ from the ones that would be addressed by the interpretation.

The purpose of these agenda papers was to summarise previous discussions, propose the scope of what is considered to be ‘minimum fill’, and analyse the applicability of the ‘minimum fill’ concept to a range of industries.

The Project Manager introduced Agenda Papers 4, 4A and 4B: Core inventories, and asked the Committee members whether they had any comments on any of the papers and whether they agreed with the staff recommendations in the papers.

A Committee member noted that the analysis performed (in agenda paper 4B) indicated that there was very little diversity in practice.  He highlighted the fact that of the six industries analysed, there was no diversity noted in four of the industries and only limited diversity noted in the other two industries. Accordingly, he questioned whether there was even a problem that required fixing if there was consistency within the industries and there was not a significant level of concern.

In response to the comment by the previous Committee member, the Director of Implementation Activities noted that although there was minimum diversity within industries, there was diversity across industries.

Another Committee member noted that he understood the staff’s logic with respect to the definition of minimum fill, but noted that he had some concerns with the approach as it would result in a significant change in practice for entities in industries where no diversity currently existed.  He questioned whether there was something missing in the analysis, and observed that the analysis concluded that if an item was considered recoverable it would be accounted for as inventory.  He noted that in some industries items may not be recovered for 40-50 years, which would suggest that the items should be classified as non-current inventories, and questioned what the value of such classification would be to users of the financial statements.  He further noted that often these items (for example, cushion gas) were needed to enable a physical asset to produce, and noted that the interpretation would result in an arbitrary distinction being made between what was inventory and what was needed to ensure a physical asset was capable of operating in the manner intended by management.  He noted that he was concerned with the direction of the interpretation and, similar to other Committee members, questioned whether an interpretation was even needed given the consistency of accounting treatment within industries.

Another Committee member noted that he shared similar concerns to those expressed by the previous Committee member.  He noted that industries appeared to have largely sorted the issue out for themselves and the direction the proposed interpretation was heading in would cause a significant change in practice.  He further noted that, as a result, the Committee would likely run into a lot of opposition during the consultation process.  He noted that he accepted that there was some different analysis between industries, but also acknowledged that the facts and circumstances in each industry would differ, and questioned whether this was a real issue or a problem the Committee was creating for itself.  With respect to the scope, he observed that the analysis in the paper concluded that an item would be accounted for in accordance with IAS 2 if it was expected to be recoverable and IAS 16 if it was not recoverable.  He further noted that he was not convinced by that distinction, adding that whether an entity was going to abandon or sell an item in 40 years’ time should be determinative of the accounting.

Another Committee member noted that within IFRS, it was accepted that there was PPE that changed its nature based on management’s intention, providing the example of PPE accounted for under IFRS 5.  He noted that IAS 16 required that any costs directly attributable to bringing an asset to the location and condition necessary for it to be capable of operating in the manner intended by management are included in the cost of the item of PPE, and these items could be such costs.  He acknowledged that at some point the entity might recover those costs, but that in order to recover those costs, the entity would have to cease operating and questioned why the item would not be treated in the same way as other assets, so when there was a change in intention, the asset would be reclassified from IAS 16 to IAS 2.  He further noted that he believed a lot of these items could fall within IAS 16 based on the fact that they were directly attributable to getting an asset up and running, and at inception, the entity’s intention would not be to recover the asset through sale but to continue using the asset to assist in the production process.  He added that by putting such items into IAS 2, he was not convinced that this would result in the correct answer or that it would be consistent with how other assets were treated.

An IASB member present noted that feedback from IASB members indicated that some IASB members were not convinced that an Interpretation was needed.

In bringing the discussion to a close, the Chairman observed that both IASB feedback and comments made by a number of Committee members questioned whether an interpretation was necessary.  Accordingly, he proposed that the Committee ended discussions and issued an agenda decision to close the matter.  Nine of fourteen Committee members present voted in favour of this proposal.

The Chairman then instructed the staff to draft an agenda decision with wording along the lines of “the Committee has not observed a sufficient basis upon which to proceed”, and to circulate the draft, and if any Committee members objected to or felt the proposed agenda decision was insufficient, then it could be brought back to the next meeting.

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