Inventory Accounting. Objective. The objective is to outline accounting requirements for inventories. Authority

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1 Subsection: Overview of General Revenue Fund Accounting Page: 1 of 10 Inventory Accounting Objective Authority Background The objective is to outline accounting requirements for inventories. The Financial Administration Act, 1993, clause 5(c) provides authority to Treasury Board to prescribe the form and manner of financial records of the Government of Saskatchewan. Inventories are a significant economic resource managed by governments and a key component in the delivery of many services and programs. There are two main types of inventory. They are Inventories Held for Consumption or Use and Inventories Held for Resale. Most of the Province s inventories are held for consumption or use and include diverse categories such as equipment maintenance and airplane parts, lab supplies and vaccines, pastures maintenance supplies, firefighting equipment, park maintenance supplies and aggregate supplies. Accurate accounting and reporting of inventories is essential for governments. Information about inventories is useful for understanding and assessing a government's accountability for and management of its asset base and future requirements for replacement. Inventories form part of a government s financial position because they provide economic resources, normally in the form of unconsumed service potential, that a government can employ in the future to accomplish its objectives. Definitions Cost is the amount of consideration given up to acquire, construct or develop inventories, and includes all costs directly attributable to acquisition, construction or development. Inventories represent items that are purchased or produced and are not immediately consumed. They are recorded as an asset until they are issued for consumption or sale, at which time they are expensed. There are two main types of inventories: Inventories Held for Consumption or Use and Inventories Held for Resale. Inventories Held for Consumption or Use are non-financial assets that will be used or consumed in the normal course of operations. Because the primary purpose of a government s operations is to provide services, the future economic benefit of inventories held for consumption or use is embodied in their capacity to render service that

2 Subsection: Overview of General Revenue Fund Accounting Page: 2 of 10 furthers the government s objectives. They are not intended for sale in the ordinary course of operations. Inventories Held for Resale are financial assets that will be sold or used to produce a product that will be sold in the ordinary course of operations. Threshold is the minimum cost an individual category of inventory must have before it is recorded as an asset in the financial records. Thresholds are applied on a category-by-category basis individually by ministry. Treasury Board Policy.01 Treasury Board requires ministries to follow the accounting policy of recording inventory as an asset and expensing its use or consumption as recommended by the Public Sector Accounting Board (PSAB) of the Chartered Professional Accountants of Canada (CPA)..02 Each ministry is responsible to maintain accounting records and prepare reports for inventories as prescribed by the Provincial Comptroller..03 This policy is effective April 1, Provincial Comptroller.04 These requirements apply to the General Revenue Fund (GRF) Directives and revolving funds..05 Accounting policies may change from time to time. These changes are communicated through notifications from the Provincial Comptroller and the Province of Saskatchewan General Revenue Fund Year End Reporting Requirements and Procedures. Ministries should monitor these changes and apply them to ministry transactions. Ministry.06 Ministries are required to: Responsibilities acquire and manage inventories to provide effective, efficient and economical program delivery; establish and maintain accounting systems to collect, record and report information on their inventories; and establish and maintain adequate internal control systems to ensure the accuracy and reliability of inventory information and reports.

3 Subsection: Overview of General Revenue Fund Accounting Page: 3 of 10 Inventory Categories.07 Inventories should be assigned to the appropriate categories based on their nature and characteristics..08 Where ministries are uncertain as to which category an inventory belongs or where no appropriate category exists, they should contact the ministry Executive Director/ Director of Administration who may consult with the Executive Director, Financial Management Branch (FMB), Provincial Comptroller s Office, Ministry of Finance. Held for Consumption.09 The following describes the types of items to include in each or Use category of inventory held for consumption or use: Equipment Maintenance, Airplane Parts and Other Supplies - includes the entire inventory required to maintain equipment, airplanes and other capital assets included in heavy equipment, operating equipment, vehicles, aircraft, bridges, ferries vessels and towers and buildings and related equipment. This category includes items such as replacement parts, fuel, grease, oil, bridge timbers, signs, building material, and parts for security systems, heating, ventilation and air conditioning systems and building operations. Lab Supplies and Vaccines - includes water bottles, gases, chemicals, reagents, general lab supplies and vaccines. Pastures Maintenance Supplies - includes fence posts, wire, feed, lubricants and other items used to maintain the pastures. Fire-fighting Equipment - includes all of the general equipment used to fight forest fires, including such items as stoves, tents, hoses, shovels, water bladders and fuel. Park Maintenance Supplies - includes firewood and park equipment maintenance supplies held in the government-managed parks. Aggregate - includes gravel, seal and base aggregate and asphalt mix used for highway maintenance. Inventory for Distribution - includes office, janitorial and other supplies purchased by the Ministry of Central Services for distribution primarily to other ministries. Held for Resale.10 Inventories for resale include items that will be sold or used to produce a product that will be sold in the ordinary course of operations. They are recorded as financial assets. Ministries

4 Subsection: Overview of General Revenue Fund Accounting Page: 4 of 10 should advise the Provincial Comptroller of categories of inventory held for resale. Excluded Inventories.11 The following inventory categories are excluded from this policy. All items in these categories should be expensed when purchased: office supplies (pens, paper, pencils, post-its); institutional supplies (food, medicine, linens and health clinic supplies); election readiness (forms, maps, booklets, pens, paper, clipboards, buttons, ballot paper); and other highway maintenance (salt and calcium, culverts, paint, and asphalt). Cost.12 Inventories should be recorded at cost..13 The cost of inventory includes the purchase price of the inventory items and other acquisition costs such as shipping and handling charges, insurance costs and duties..14 The method selected for determining cost should be one that results in the fairest matching of costs with program delivery activity..15 Several common methodologies used to determine cost are: Specific identification the cost of each item in the inventory is identified on an item-by-item basis; Average cost the cost of an item is determined from the weighted average of the cost of similar items purchased during the year; and First in first out the cost of the first items purchased is the cost assigned to the first goods sold or consumed. Thresholds.16 A threshold represents the minimum cost an individual category of inventory must have before it is to be recorded on the statement of financial position..17 A threshold of $100,000 per category should be applied on a ministry-by-ministry basis..18 Inventories that meet the definition of inventory but are under the threshold should be expensed in the year in which they are

5 Subsection: Overview of General Revenue Fund Accounting Page: 5 of 10 purchased..19 Ministries or revolving funds may choose a lower threshold for recording inventories held for resale. Capitalized Inventories.20 Inventories should be capitalized when they are a direct cost of a constructed or developed asset. Write-downs.21 Inventories held for consumption or use should be written down when a reduction in the value of their service potential can be measured and the reduction is expected to be permanent..22 Inventories held for resale should be written down when their net realizable value is less than their cost and the reduction is expected to be permanent..23 Ministries may need to consider a write-down where they hold obsolete inventory, slow moving inventory or damaged items, or when inventory levels are expected to be surplus to needs..24 All write-downs should be approved by the permanent head or delegate. Documentation for write-downs should be submitted to the Provincial Comptroller for review..25 Write-downs of inventory should be accounted for as an expense of the current period..26 Generally, a write-down should not be reversed. Donated Inventories.27 If inventory is donated to the Government, the cost is its fair value at the date of contribution. Fair value of donated inventory may be estimated using market or appraised value. Refer to HUSection 3525 Receipt of Donations. Budgeting.28 Ministries are required to appropriate funds for inventory purchases. Any significant changes in the value of inventories and write-downs should be budgeted for and displayed in the Estimates. Accounting Requirements.29 Each ministry is responsible for recording transactions for its own inventories in the Government s central financial system and maintaining a supporting detailed subsidiary ledger.

6 Subsection: Overview of General Revenue Fund Accounting Page: 6 of Inventory purchases are charged to an appropriation and are initially expensed. Inventory items returned in the same year they are purchased should be recorded as refunds to vote in accordance with HUSection 3005 Refunds to VoteUH. Inventory items returned in subsequent years should be recorded as refunds - previous years expenses..31 The change in inventory account is used to adjust the inventory balance without affecting spending control. Balances in this account are included in the statement of operations. All adjustments to inventory are recorded through the change in inventory account including the following: Increases in inventory: the initial recording of new inventory; and purchases. Decreases in inventory: inventory usage; inventory returns; and write-downs. Refer to Schedule A for examples of transactions and the appropriate accounting for them..32 Ministries are responsible for maintaining source documents, working papers and files supporting inventory transactions for internal and external audit and review..33 Each ministry should maintain an inventory subsidiary ledger which substantiates and is in agreement with the ministry s inventory information recorded in the Government s central financial system..34 Ministries should at least annually agree the cost information in the subsidiary ledger to the inventory balance recorded in the central financial system. Any differences should be followed up and any required accounting entries made..35 Ministries should maintain sufficient information in their subsidiary ledgers to meet reporting and internal control requirements.

7 Subsection: Overview of General Revenue Fund Accounting Page: 7 of 10 Exemption from.36 Where a ministry believes that any of the requirements set Requirements out in this directive are inappropriate for the ministry or a revolving fund under its administration, the ministry may submit a written request to the Provincial Comptroller for an exemption. The request should outline the reasons why the requirements are not suitable and include a plan that would be more appropriate..37 The Provincial Comptroller will advise the ministry of the decision in writing. Further Information.38 Questions regarding inventory accounting may be directed to the ministry Executive Director/Director of Administration who may consult with the Executive Director, FMB. References 3525 Receipt of Donations 3800 Control of Property 3805 Management of Inventories HProvince of Saskatchewan General Revenue Fund Year End Reporting Requirements and Procedures CPA Public Sector Accounting Handbook, PS 1200 Financial Statement Presentation CPA Handbook, 3031 Inventories

8 Subsection: Overview of General Revenue Fund Accounting Page: 8 of 10 Illustrative Entries Schedule A Thresholds (paragraphs to ) 1. Ministry X reviews its records of lab supplies and vaccines at year-end and determines the cost is $1.3 million. This is a new category of inventory for the Ministry and has never been recorded before. Lab Supplies and Vaccines Inventory $1,300,000 Change in Inventory Held for Consumption or Use $1,300,000 - initial recording of inventory 2. Ministry X reviews its records of equipment maintenance at year-end and determines the cost is $90,000. This category of inventory had previously been recorded at $110,000. Change in Inventory Held for Consumption or Use $110,000 Equipment Maintenance, Airplane Parts and Other Supplies Inventory $110,000 - record change in inventory (remove the inventory as it is now under the threshold) 3. Ministry X reviews its records of equipment maintenance at year-end and determines the cost is $4 million. This category of inventory had previously been recorded at $3.5 million. Equipment Maintenance, Airplane Parts and Other Supplies Inventory $500,000 Change in Inventory Held for Consumption or Use $500,000 - record change in inventory Write-down (paragraphs to ) 4. In July, Ministry X reviewed its inventory of Lab Supplies and Vaccines. Staff determined that a shipment of glass beakers purchased last year worth $24,000 is missing. This inventory category is currently recorded by the Ministry at $2.8 million. Change in Inventory Held for Consumption or Use $24,000 Lab Supplies and Vaccines Inventory $24,000 - record write-down of inventory and report to the Provincial Comptroller

9 Subsection: Overview of General Revenue Fund Accounting Page: 9 of Ministry X purchases new pumps for forest fire fighting. As a result, none of the hoses currently recorded in inventory fit and they have no other use to the Ministry. The old hoses have a cost of $78,000. Change in Inventory Held for Consumption or Use $78,000 Fire-fighting Equipment Inventory $78,000 - record write-down of inventory Acquiring Inventory (paragraph ) 6. Ministry X purchases replacement parts and oil for the maintenance of its vehicle fleet for $27,000. Their inventory of equipment maintenance items is currently recorded at $2.2 million. Repairs and Maintenance Expense $27,000 Accounts Payable $27,000 - record purchase Excluded Inventory (paragraph ) 7. Ministry X reviews its records of stationery at year-end and determines the cost is $121,000. No entry required. Office supplies are expensed when purchased and not recorded as inventory. Inventory Returns (paragraphs ) 8. In November, Ministry X determines that equipment with a cost of $100,000, that was purchased and set up as inventory in October, is defective and returns the equipment for a refund. Accounts Receivable $100,000 Repairs and Maintenance Expense $100,000 - a debit memo records the refund to vote (to the same account used to record the original expense)

10 Subsection: Overview of General Revenue Fund Accounting Page: 10 of 10 At the same time, or as part of a journal entry to record other changes to inventory, the inventory balance is updated for the return: Change in Inventory Held for Consumption or Use $100,000 Equipment Maintenance, Airplane Parts and Other Supplies Inventory $100,000 - record change in inventory 9. In May, Ministry X determines that an airplane part with a cost of $45,000, that was purchased and set up as inventory in the previous fiscal year, is defective and returns the airplane part for a refund. The accounts receivable, refund and change in inventory can be recorded as one journal entry, or the change in inventory can be recorded separately as part of the normal process to adjust inventory: Accounts Receivable $45,000 Refunds Previous Years Expenses $45,000 - record the refund without affecting the current year appropriation Change in Inventory Held for Consumption or Use $45,000 Equipment Maintenance, Airplane Parts and Other Supplies Inventory $45,000 - record change in inventory