The Turkish Accounting Standards 2 (TMS 2) stated in the New Turkish Trade Law declare issues concerning the inventory cost methods on date basis. The purpose is to determine the costs and incomes in order to show the actual value of the company assets on the financial statement date and determine the periodical income accurately. There are certain definitions explained in the aforementioned standard concerning the inventory which includes inventory evaluation, inventory costs, sales and conversion costs, joint products and byproducts, marginal costing, inventory valuation methods, net realizable value and information required for reporting. Inventory is evaluated by either cost or net realizable value depending on the lesser amount according to the Standards. Let us explain it further:
Net realizable value is calculated by deducting the anticipated sales volume of the inventory from the total of the estimate at completion (additional costs required to complete semi-finished goods or to make finished goods marketable) and sales expenses.
Inventory cost includes all purchase costs, conversion costs and assumed costs required to bring inventory into its current condition.
Inventory purchase costs include purchase price, import and other taxes, transport, loading and unloading expenses and other costs directly related to acquiring goods, stocks and services. Commercial and similar discounts are considered while determining the purchase costs.
Standard cost method or retail sales method can be used to evaluate the inventory costs provided that the results are similar to the inventory cost. Standard cost method takes normal levels of material and stocks, workmanship, efficiency and capacity utilization into consideration. These costs are reviewed regularly and revised considering the current circumstances when required.
Retail sales method is used by companies performing retail sales in inventory valuation including a great number of rapidly changing assets having a similar profit margin. This method is used when other cost methods are not practical.
Inventory cost is calculated by subtracting the sales value from an appropriate profit margin. Stocks priced under the original sales price are taken into account when determining the percentage rate. An average rate can be used for each retail sales department. Inventory cost may not be recovered in case that stock is damaged or is out of date partially or completely or in case of a reduction in sales prices or an increase in expected estimate at completion or expected sales costs. In such cases, inventory cost may exceed the net realizable value of the relevant stock.
Value decrease in inventory is generally reduced to the net realizable value in the number of individual inventory items of inventory groups. Net realizable value estimations are made depending on the sales volumes expected in case of selling the most reliable stocks on the estimation date. While making these estimations, the relevant costs and fluctuations in prices after the statement date are also considered provided that it complies with the conditions of period-end.
While estimating the net realizable values, it is also important to keep the inventory on hand. For instance, the net realizable value of the inventory on hand is based on the contract price in order to fulfill registered standing sales and service contracts. A provision for losses is not allocated for the materials and goods kept on hand as to utilize in production if it is expected that the relevant goods produced by these materials will be sold for their prime cost or for a higher price.
However, if a decrease in material price indicates that product's prime cost will exceed the net realizable value, it can be reduced to the net realizable value of the material. In such cases, the material's replacement value can be the most appropriate standard for the net realizable value.
The net realizable value is reviewed in each following accounting period. Provided that certain circumstances leading to reduce the stocks to the net realizable value lose their validity, the provision for losses is canceled.
When the stocks are sold, the net book value of these stocks must be recorded as an expense of the relevant period. The provision of losses reduced to the net realizable value of the stock and all stock related losses are recorded under general ledger accounts as an expense.
This standard requires an explanation about the issues concerning the inventory in financial statements:
- Accounting policies adopted in inventory valuation including the current cost calculation method,
- The total net book value of the inventory and their individual amounts grouped separately by company criteria,
- The amount of stocks recorded by net realizable value,
- The provision for losses cancelled and associated with the income within the period respectively
- The circumstances and events lead to the cancellation of the provision for losses
- The net book value of the stocks pledged as a collateral for the debts