IAS 16 – Core inventories

Date recorded:

The project manager gave an overview of Agenda Paper 15: Core Inventories. She began by saying that the IFRS Interpretations Committee (IFRS IC) had received a request for clarification on whether ‘core inventories’ held in an entity’s own facilities were accounted for as inventories or as property, plant and equipment. Core inventories, she continued, were necessary to start operating and maintain subsequent production, could not be physically separated from other inventories and could be removed only when the production facility was finally decommissioned or at considerable financial charge. The staff recommended to issue a tentative rejection notice. They proposed to clarify in the tentative agenda decision that core inventories that were necessary to bring a property, plant and equipment asset to its required operating conditions, were recognised as an element of property, plant and equipment (PP&E).

One Committee member said that there was significant diversity in practice but that an agenda decision would not be able to solve this. She continued by saying that the definition of core inventory in the proposed tentative agenda decision was not sufficiently clear and that this would give leeway to structuring. Furthermore, she would like to see a discussion of core inventories in light of the definition of ‘inventories’ given by IAS 2 Inventories. She said that she did therefore not support the proposed tentative agenda decision. Another IFRS IC member agreed and said that the staff needed to analyse further as there was significant diversity in practice.

One Committee member said that he was fine with the general direction of the agenda decision. He said that PP&E would be the predominant practice so he did not see a problem with diversity in practice. This was supported by another IFRS IC member. He said that he was happy with the notion that it could only be removed when the production facility was finally decommissioned or at considerable financial charge. He said it was important that core inventories were not sold on arbitrage opportunities. This was supported by other Committee members. One of them said that he would like to see the statement in the agenda paper in the actual Standard. Another one of them said that although he agreed, he had concern that there were many things in production processes the Committee did not know about that would fall in the definition and that the proposed tentative agenda decision would be very interpretive.

One IFRS IC member asked whether it would be labelled in financial statements whether things were core inventories or regular inventories. Another Committee member said that if it were PP&E, it should be visible from its useful life and other disclosures.

One Committee member said that when the IFRS IC was dealing with issues that could be covered by two Standards and the Committee decided on which Standard should apply, it was usually in the form of an Interpretation.

An IASB member said that disclosures were important as those inventories could be significantly undervalued and asked the Committee which disclosures would be useful.

The Committee discussed some examples of core inventories and issues that arise from them.

The chairman summarised that there was diversity in practice, that some Committee members were unhappy with the definition of ‘core inventories’ and that some were of the opinion that deciding which Standard to apply would be an Interpretation rather than a rejection notice. Upon asking who would object to taking this item onto the agenda, no one objected.

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