Inventory provisions
Theory:
- Provisions for inventories should be made as a result of impairment or as a result of valuation to net realisable prices in place of purchase prices or manufacturing costs.
- The principle of prudent valuation requires updates of asset valuation => update of asset value (IAS 2 par 28,33)
- Recorded prices of inventories - purchase or manufacturing costs - may not be higher than the net realizable prices (NRV) (IAS 2 par. 9)
Practice - examples of errors:
- Most often inventories are overvalued
- No provision is calculated in respect of slow-moving or obsolete inventories
- Reference of evidence prices is not made to net realisable prices
- Provision estimates are unrealistic, not related to the actual values of the written down inventories and the their useful life.
