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august 3, 2021
How an Accountant Should Estimate Inventories According to the Federal Accounting Standard 5/2019
SberSolutions blog on
By Tatyana Tereshko
Руководитель управления методологии финансового аутсорсинга СберРешений
From January 1, 2021, an organisation shall perform accounting of inventories in accordance with the new federal accounting standard 5/2019 (hereinafter – the "FAS 5/2019"), approved by the decree of the Ministry of Finance No.180n of 15.11.2019. The standard shall be obligatory applied by all companies, except for budgetary organisations and micro-enterprises that use simplified accounting methods.
Основные изменения
The most significant changes have affected the classification and measurement of inventories: work in progress is again included in the scope of inventories, new groups of inventories have been introduced, new evaluation methods are applied, including at fair value, and a mandatory review of inventories for impairment, based on the net realizable value, has been also established.

There were also introduced new rules for accounting of unfinished and finished goods, new disclosures of information on inventories.

Now it isn't necessary to record the receipt of inventories by names and units of measurement of suppliers, as it was required by the Methodological Guidelines 119n. By the way, they became invalid since the FAS 5/2019 came into force.

When an organisation accepted inventories for accounting, it is allowed to change the units of accounting, because a company has the right to individually determine the name and unit of inventories based on their type, purpose and plans for use (pp.6, 7 FAS 5/2019).
Evaluation of inventories within acceptance for accounting (except for finished goods and work in progress)
The major part of inventories is evaluated within receipt on the actual cost. All types of discounts, benefits, concessions from suppliers reduce the actual cost. Refundable taxes and contributions, including VAT, shall be deducted as before.
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According to the FAS 5/2019 the actual cost includes expenses for the creation and (or) acquisition of inventories. Besides that, it includes expenses for bringing inventories to the condition and location, necessary to their consumption, sale or use, which were previously included into the cost of acquiring stocks in kind of transportation and procurement costs, in particular:

  • Costs for processing, sorting, packing, improving the technical characteristics of inventories;
  • Delivery to the place of sale, consumption and use of inventories; as well as new items:
  • Estimated liabilities for dismantling, disposal, environmental restoration;
  • Interest expenses for deferred payment (if the payment is deferred for more than 12 months). The amount of interests is determined either by agreement or by settlement.
If an organisation applies a simplified method of inventories accounting, then, according to p.7 FAS 5/2019 the actual prime cost of inventories includes only the amounts, payable to the seller (excluding VAT, as of the date of recognition), whereas the other costs, connected with acquisition and delivery of stocks, may be written off to the expenses of the period. Please note that the procedure for applying simplified methods of accounting shall be specified in the accounting policy of the organisation.

The FAS 5/2019 introduced special rules for recognizing inventories - tangible assets that remain at the full or partial disposal of the organisation after withdrawal of non-current assets, as well as inventories, generated in the process of maintaining and repairing non-current assets.

In such cases, the smallest of the values is taken as the actual prime cost:

  • the cost of accounting for similar inventories, created or acquired in the normal operating cycle;
  • the balance sheet value of the assets being written off and the costs of dismantling and disassembling fixed assets, bringing them to the condition necessary for sale, consumption, use.
The prime cost of inventories does not include expenses, connected with emergency situations, accidents, natural disasters, as well as expenses for storage. The exception is storage, which is a part of preparation for use or it is caused due to the peculiarities of creation (acquisition).
    The stock was received free of charge or under an exchange agreement
    In this situation the stock is entered into records at the fair value of the received property. For the purposes of FAS 5/2019, the fair value is determined by the procedure established by the IFRS 13 "Fair Value Measurement", which was put into effect in the Russian Federation by the decree of the Ministry of Finance of Russia of 28.12.2015 No.217n. If the fair value of the received property cannot be determined, the fair value of the transferred inventory shall be used. However, in our opinion, such cases will be very rare.

    If an organisation uses simplified accounting methods, the fair value of the received inventories may not be determined, but recorded at the balance sheet cost of the transferred assets or at the actual cost of performance of works or rendering services in the event that non-assets were exchanged (p.14 FAS 5/2019)
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    Assessment of work in progress and finished goods
    There was introduced a definition of direct and indirect costs. The actual prime cost of work in progress includes both these and those costs. Direct costs are expenses, which directly refer to the production of a certain type of products, works and services. Indirect costs are expenses, which may not be directly referred to the production of a specific type of products, works and services.

    An organisation shall individually determine the lists of direct and indirect costs, as well as the method for the allocation of indirect costs. It is important to remember that production costs don't include the following:

    • excess costs that arise, as a rule, due to defects, downtime, etc. (previously they were
    • included in the prime cost of work in progress and finished goods);
    • extraordinary expenses;
    • administrative expenses (excluding those directly related to production);
    • storage costs (excluding those that are a part of the technology);
    • expenses for advertising and products promotion;
    • other expenses not related to production (p.26 FAS 5/2019).
    Seriation also makes a difference. If a company produces single orders, they are reflected in the accounting and reporting at the actual prime cost.

    In case of mass (serial) production, it is possible to estimate work in progress:
    • at direct costs; or
    • at planned (standard) prime cost.

    The planned (standard) costs are fixed in the planned calculations and estimates based on the normal (usually necessary) volumes of the use of production resources under the conditions of normal capacity utilization. Planned costs are subject to revision when production conditions change. All excess costs are immediately written off as a loss for the period.

    The difference between planned and actual production costs is recorded as a discrepancy in the period in which sales revenue is recognized (p.27, pp."a" p.43 FAS 5/2019) and it is also written off as expenses for the period.
    Evaluation of certain groups of inventories on the fair value
    Products of agriculture, forestry and fishery of own production, as well as goods traded on the organized markets, are allowed to be measured when recognized on the fair value (p.19 FAS 5/2019).

    As of the reporting date these inventories are also evaluated on the fair value, whereas the amount of revaluation is recorded as income or expense.
    Inventory accounting
    It is allowed to evaluate retail goods on the sales value with separate accounting of markups. The amount of markups shall be regularly reviewed in accordance with current terms of procurement and sale of goods.

    At that, as before, it is allowed to include into the scope of commercial expenses the costs on preparation and delivery of goods to central warehouses (bases), performed before their transfer to sale.
    Please note that options of evaluation on the fair value or sales cost are allowed, meaning they aren't obligatory but shall be fixed in the accounting policy as the accounting choice of the organisation.
    Evaluation of inventories within withdrawal
    This situation hasn't been changed. While inventories are released to production, or goods or finished products are shipped to the buyer, as well as within inventories writing off, the prime cost shall be calculated by one of the following method:

    • on the prime cost of a unit of goods;
    • on the average prime cost, calculated for the month, week, day, another period, or as new batches of stocks arrive;
    • by FIFO method.
    If the organisation is confident that inventories won't bring economic benefit in future, their cost shall be at once written off to the expenses of the period (p.41 FAS 5/2019).
    Net sales value and impairment of inventories
    The FAS 5/2019 introduces a new concept – net sales value. This is an estimated price at which an organisation could sell inventories in that type, in which it usually sells them in the normal course of business, less the estimated costs of producing, preparing for sale and making a sale.

    The net value of inventories, other than finished products and goods, is a calculated value. It is defined as a share of the estimated price at which the organisation can sell finished goods, works, services, or in the production of which the specified inventories are used. The share should correspond to the contribution of the given stock to the finished product, for example, a pro rata basis or a functional and cost analysis method can be used.
    Only if the determination of the indicated amount is difficult, the net sales value of inventories, other than finished goods, goods, can be taken as the price at which it is possible to purchase similar inventories on the market as of the reporting date.
    Any positive difference between the actual prime cost of inventories over their net realizable value is considered to be an impairment of inventories. If inventories are impaired, the organisation creates a reserve for impairment in the amount of the excess of the actual prime cost of inventories over their net realizable value. If the net realizable value of inventories for which impairment has been recognized increases, the balance sheet cost of such inventories is increased to their net realizable value by restoring the previously created reserve (but not more than their actual prime cost).

    Impairment of inventories recognized in the reporting period is included in the expenses of the period (p.31 FAS 5/2019). An organisation shall choose the specific item of the Financial Results Statement, which reflects impairment, and fix its choice in the accounting policy. This can be both the prime cost of sales and other expenses.

    Organisations, applying simplified accounting methods, can evaluate inventories only on the actual prime cost, without any impairment recognized.

    The abovementioned changes are a serious step towards increasing the reliability of data in the RAS financial statements; accordingly, it is becoming an increasingly reliable source of information for management and investment decisions.
    All changes related to the beginning of applying the FAS 5/2019 should have been introduced into the accounting policy at the end of 2020 In order not to miss anything important anymore, we offer entrusting your accounting to SberSolutions. The most experienced specialists, favorable conditions and comprehensive support are at your service.

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