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POSSIBILITIES OF IMPROVING THE ACCOUNTING OF INVENTORIES BASED
ON IFRS
Bayjanov Sarsengaliy Xalmuratovich
Karakalpak State University, Uzbekistan, Nukus.
e-mail: sbx2112@mail.ru
Тел.: +9989750003988,
Abishov Muxammed Sarsenbaevich
Karakalpak State University, Uzbekistan, Nukus,
e-mail: muxammedabishov@gmail.com
Тел., +998885070082
Abstract:
This article demonstrates that when transitioning to international accounting
principles, it is advisable to assess inventories at average prices, to assess inventories at current
prices, to present their valuation as close as possible to the actual valuation for the reporting
period, and to provide users of financial statements with complete and accurate information
about inventories valued at current prices.
Keywords:
International Financial Reporting Standards (IFRS), International Accounting
Standards (IAS), inventories, FIFO, AVECO and LIFO.
In the current process of globalization, our country's economy is also occupying high positions
on the world stage. In particular, the direct attraction of foreign investment into the country's
economy, the creation and operation of free economic zones necessitate the organization of
accounting based on international financial reporting standards. Currently, international
financial reporting standards are increasingly being used by organizations in preparing
accounting data aimed at meeting the needs of external users. This situation is undoubtedly
explained by a number of reasons, such as improving the quality of information, reducing the
cost of capital, and facilitating access to the capital market. As a result, today almost all
countries are trying to use these international standards, which are the only accounting language
for business, in their economies.
In particular, a number of measures are being implemented in our country in this regard. The
adoption of the Decree of the President of the Republic of Uzbekistan "On Additional Measures
for the Transition to International Financial Reporting Standards" (PQ-4611, 2020) serves as
the legal basis for the work being carried out in this area. In accordance with this decision,
starting from January 1, 2021, joint-stock companies, commercial banks, and enterprises
belonging to the category of large taxpayers are required to prepare financial statements in
accordance with the FEX, as well as to bring the training of specialists in this field into line
with international standards, thereby attracting foreign investment, and other tasks have been
defined.
At the same time, the New Uzbekistan Development Strategy for 2022-2026 (PF-60, 2022)
outlines measures to further improve the investment climate and increase its attractiveness in
the country, attracting 120 billion US dollars, including 70 billion dollars of foreign investment,
in the next five years.
The use of FEXS in accounting serves as the primary tool for implementing these reforms. One
of the essential topics of the International Financial Reporting Standards (FEXS) is the
valuation of inventories, determining their cost, and reflecting them in the financial statements.
This is regulated by FEXS "Supplies" No. 2. Currently, addressing issues related to the
recognition of inventories, determining their cost, valuation, and reflection in financial
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statements within international standards, as well as demonstrating best international practices
in this area, is among the most pressing issues.
IAS 2 is a standard issued by the International Accounting Standards Board (IASB) that
provides guidance on inventory accounting. The purpose of IAS 2 is to establish inventory
accounting procedures and ensure their measurement at minimum cost and net realizable value.
Inventories are understood as assets stored for sale in the form of materials or materials
consumed in the process of ordinary economic activity, such as in the production process or in
the production process or in the provision of services. Inventory Measurement According to
International Standards (IAS 2), inventory should be measured at the lowest cost and net
realizable value.The cost of inventories must include all costs associated with acquisition,
conversion costs, and other costs associated with bringing inventories to their current location
and condition. Costs should also include the allocation of additional costs arising in the
production process. The net realizable value is determined as the approximate selling price in
the usual business process, after deducting the approximate costs for completion and the
approximate costs necessary for sales.
Price Formulas IAS 2 allows for the use of several cost formulas to determine the cost of
inventories, including the first-in and first-out (FIFO) method, the weighted average cost
method, and the special identification method. Companies can choose a cost formula that best
reflects the flow of goods and the cost structure of their business.
Disclosure Requirements IAS 2 requires companies to disclose their accounting policies that
will be used to determine the cost of inventories, including the total book value of inventories
and any reduction to the net realizable value. The impact of IAS 2 is crucial for companies with
inventory in IAS 2. Companies must carefully review the cost of their inventory and ensure its
accurate valuation. Incorrect valuation of inventories can lead to overstatement of assets and
profits, which can lead to incorrect reflection in the financial statements and potential legal or
regulatory issues. IAS 2 provides guidelines for accounting for inventories and ensures their
valuation at minimum cost and net realizable value.
Companies should carefully consider the cost of their inventories and use appropriate cost
formulas to determine their value. Accurate inventory valuation is crucial for the reliability of
financial statements and can affect the company's financial position and operations[1].
The purpose of this standard is to establish the inventory accounting regime. The main issue of
inventory accounting is determining the amount of expenses recognized as an asset and
transferred to future periods until the corresponding receipts are recognized. This standard
provides guidance on determining cost and recognizing it as an expense, as well as reducing it
to any net realizable value. At the same time, instructions are provided on the cost calculation
formulas used to convert expenses into inventory value in this case.
The following should be reflected in these standard financial statements:
(a) the accounting policy adopted for inventory valuation, including the cost calculation
formula used;
(b) the total book value of inventories and the book value of appropriately classified inventories
for the organization;
(c) the book value of inventories at fair value less selling expenses;
(d) the amount of inventories recognized as expenses during the reporting period;
(e) Any reduction in the value of inventories recognized as an expense during the reporting
period in accordance with this clause.
(f) Any reinstatement amount recognized as a decrease in the amount of inventories recognized
as expenses during the reporting period in accordance with this clause.
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(g) Conditions and events that led to a decrease or restoration of inventory value in accordance
with this clause;
(h) the book value of assets pledged as security for obligations.
Information on the book value of the inventory group and the volume of changes in these assets
is useful for financial statement users. Typically, inventories are divided into classes such as
goods, raw materials, materials, work in progress, and finished goods. The amount of
inventories recognized as an expense during the reporting period, often referred to as the selling
price, consists of expenses previously included in the valuation of the currently sold inventory,
overhead costs of undistributed production, and the excess amount of inventories over the
production cost norm. The cost of goods sold, depending on the specifics of the organization's
activities, may include other amounts, such as distribution costs.Some organizations use the
profit or loss statement form, which is presented in other amounts instead of the cost of
inventories recognized as expenses during the reporting period. In this form, the organization
offers cost analysis using a classification based on the nature of expenses. In such cases, the
organization reflects the expenses incurred for raw materials and supplies recognized as
expenses, including wages and other expenses, along with the net change in inventories during
the reporting period.
This standard should be applied by organizations starting from January 1, 2005, but
organizations approve its application starting from previous dates. If an organization applies
this Standard for the period before January 1, 2005, it must indicate this fact. The definition of
the actual price in paragraph 6 and amendments to paragraph 7 were made to FEXS No. 13,
published in May 2011. The organization must implement these changes in conjunction with
FEXS No. 13.Amendments were made to paragraphs 2, 8, 29, and 37 of IFRS 15 "Revenue
from Contracts with Customers," issued in May 2014, and 19 items were removed. The
organization must implement these changes in conjunction with FEXS 15. Changes were made
to two clauses of FEXS No. 9, published in July 2014. The organization must implement these
changes in conjunction with FEXS No. 9. Amendments were made to 12 clauses of FEXS No.
16 " Lord" published in January 2016. The organization should support this change in
conjunction with FEXS No. 16.
Correct and accurate valuation of inventories in accounting is of paramount importance.
According to Article 17 of the Law of the Republic of Uzbekistan "On Accounting" regarding
the valuation of assets and liabilities, inventory valuation is carried out at the lowest of the
following two prices: actual cost (purchase price or production cost) or market price (net
realizable value) at the balance sheet date [2].
Based on NAS No. 4 "Inventories
,
" inventory valuation at the enterprise is carried out in the
following two ways [3]:
Net realizable value method
The method of a constant share of gross profit from sales.
In International Accounting Standard No. 2 "Supplies
,
" valuation is carried out in the following
two ways [4]:
- Net realizable value method;
- Fair valuation method.
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Method of constant share of gross
profit from sales
NAS No. 4 "Inventories"
IFRS No. 2 "Reserves"
Fair valuation method
Net realizability value
In the diagram below, the methods of inventory valuation according to BEMS 4 and FEXS 2
are presented in a structured form (Figure 1).
Figure 1. Methods of inventory valuation according to national and international
standards
According to FEXS No. 2, reserves are:
• intended for sale within the framework of regular activities;
• in the production process for such sale or
• Assets in the form of raw materials or materials used in the production or provision of services.
According to A.E. Zhminko, "The accounting of inventories is the most problematic aspect of
accounting, as the transition to the principles of international financial reporting standards
implies that the correct valuation of inventories depends on the cost of goods sold and net
profit" [5].
In their works, S.N. Tashnazarov and D.D. Pashaxodjayeva stated, "The cost of inventory (ZT)
is the sum of the cost of purchased goods (ZXT), the cost of processing inventory (ZQIT), and
other overheads (BO) [6]." This can be expressed by the following formula:
ZT = ZXT + ZQIT + BO
(1)
The international standard specifies the application of cost accounting methods at both actual
cost and selling price. In international practice, the use of the FIFO, Average Value, and LIFO
methods is envisaged in cases where it is impossible to identify all inventory valuations and
apply this method. No. 16 stated that the LIFO method is not provided for in the new edition of
the FEXS, citing the need to account for the cost of inventories.
Economists Sh.T. Ergasheva, A.K. Ibragimov, N.K. Rizayev, and I.R. Ibragimova, in their
works, discuss the issues of accounting for inventories according to international standards [7]:
"The main issue in accounting for inventories is the amount in which the cost of inventories
should be considered as an asset and the income associated with them should be accounted for
until future periods are envisaged." This standard provides guidance on cost and its subsequent
allocation as an expense, as well as its reduction to any net realizable value. It also provides
guidelines for cost calculation formulas used in determining the cost of inventories.
1
Authors' development using Internet data
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FEXS No. 2 "Inventories" allows for the use of various methods for determining the cost of
inventories if the results of their use represent an approximate cost. The following are used to
determine the cost of inventories:
1. Method of separate identification of specific expenses;
2. FIFO method (initial revenue - initial cost);
3. By the AVECO method.
Goods and materials used separately by business entities (precious metals, precious stones, and
others) and not substituting for each other (i.e., they are not typically interchangeable), as well
as those produced and intended for special projects, are valued using the separate cost
identification method. In this way, special expenses are allocated to specific inventories. This
method of illumination is suitable for products intended for special projects, regardless of
whether they are purchased or manufactured.
According to the FIFO method, the cost of disposable units of inventories primarily includes
the price of purchased or produced inventories, and the price of inventories at the end of the
period is formed from the total price of the last purchased or produced units of inventories.
According to the AVECO method, the price of each unit of inventory is determined based on
the weighted average price of identical units at the beginning of the period and the price of
identical units purchased or produced during the period. Determining the price of each unit of
inventory using the AVECO method is carried out by dividing the total cost of identical units,
formed from the cost and quantity of inventory remaining at the beginning of the period, and
the cost and quantity of inventory received during this period, by their total quantity. The
average price can be calculated according to the method chosen by the organization,
periodically, or based on the arrival of each new batch of inventories.
Table 1
Methods of inventory assessment used in the practice of foreign countries
Countries
FIFO
Average price
(AVECO)
Sale price Others
USA
+
+
-
Method of retail sale
Germany
+
+
+
XIFO, LOFO, KIFO, KILO
France
+
+
+
-
UK
+
+
+
-
Italy
+
+
-
-
Greece
+
+
-
Method of stocking finished products
Spain
+
+
-
-
Luxembourg +
+
+
Actual expenses
Netherlands +
+
-
Method of storing finished and
unfinished work
Portugal
+
+
-
Standard and special (market) value of
reserves
Russian
+
+
-
Cost method for each unit
Switzerland +
+
-
-
Sweden
+
-
+
Method of concluding a contract
2
Authors' development using Internet data
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Based on the data in Table 1, it can be concluded that the most common methods for accounting
for inventories are weighted average prices (AVECO) and FIFO. Therefore, when transitioning
to international accounting principles, it is advisable to assess inventories at average prices.
Evaluating inventories at current prices allows for presenting their value as close as possible to
the actual value for the reporting period. Inventories valued at current prices allow users of
financial statements to obtain complete and accurate information. Accurate and comprehensible
disclosure of inventory information in financial statements ensures the accuracy and
transparency of accounting information.
In the context of the global economy, it would be advisable to utilize the best practices of
developed foreign countries, such as the USA, Germany, and other countries, in the formation,
classification, and evaluation of inventories in accordance with international standards. This, in
turn, creates the opportunity for organizations to establish strict control over the entry,
revaluation, and exit of inventories, while also ensuring the accuracy and transparency of
financial statements.
It can also be said that in the current environment of increasing inflation, it is advisable to use
the FIFO method for inventory valuation. Because in this method of cost estimation, as
mentioned above, the cost of originally disposed inventories includes the cost of originally
purchased or produced inventories, and at the end of the period, the cost of originally purchased
or produced inventories is added to the cost of originally disposed inventories. This, in turn,
prevents a sharp increase in the price of goods and products in the market.
REFERENCES:
1.
- Sun’iy intellect (Chat GPT) ma’lumotlari.
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OʼRQ-404-son Qonuni.
3. Bobojonov O., Jumaniyozov K. Moliyaviy hisob. – T.: «Moliya» nashriyoti, 2002. -672- b.
4. «Zaxiralar» nomli 2-son MHXS.
5. Jminko A.E. Международная практика учета запасов. Научный журнал. КубГАУ. –
2014 г. №99 (05). – 1-12 с.
6. S.N. Tashnazarov va D.D. Pashaxodjayeva. Xalqaro hisob asoslari. O’quv qo’llanma (II qism)
– Samarqand : SamISI, 2020 yil. 29 b.
7. Sh.T.Ergasheva, A.K.Ibragimov, N.K.Rizayev, I.R.Ibragimova. Moliyaviy hisobotning
xalqaro standartlari. O’quv qo’llanma. T.:2019.
