ASBE No. 01
Active
Inventories
Inventories is part of the Chinese Accounting Standards for Business Enterprises (ASBE).
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Conceptual Framework Linkage
One of the earliest and most closely converged ASBEs
ASBE No. 1 governs the RECOGNITION, MEASUREMENT, and DISCLOSURE of INVENTORIES – assets held for SALE in the ordinary course of business, in the PROCESS of production for such sale, or in the form of MATERIALS or supplies to be CONSUMED in production or the RENDERING of services. This is ONE of the FOUNDATIONAL specific standards issued alongside the 2006 ASBE overhaul, and REMAINS substantially CONVERGED with IAS 2 internationally.
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Scope
All enterprises holding inventories for sale, production, or consumption
This Standard applies to ALL enterprises with INVENTORIES WITHIN its scope – EXCLUDING work-in-progress arising under CONSTRUCTION contracts (governed by ASBE No. 15), financial instruments, and the BIOLOGICAL assets addressed separately by ASBE No. 5, WHERE those items fall OUTSIDE the general inventory definition.
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Initial Measurement – Cost Components
Purchase cost, processing cost, and other costs to bring inventory to its present condition
Cost componentDescription
Purchase costPurchase price, related taxes, transport, loading/unloading, and other directly attributable costs, LESS trade discounts and rebates
Processing costDirect labour and a SYSTEMATIC allocation of production overheads incurred in converting materials into finished goods
Other costsOther expenditures incurred in bringing the inventory to its PRESENT location and condition
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Cost Formulas – No LIFO Permitted
Weighted average, FIFO, or specific identification only
For inventory items that are NOT ordinarily interchangeable, or goods/services PRODUCED and SEGREGATED for specific projects, the SPECIFIC IDENTIFICATION method is used. For OTHER inventories, the WEIGHTED AVERAGE COST or FIRST-IN, FIRST-OUT (FIFO) formula is applied – the LAST-IN, FIRST-OUT (LIFO) formula is NOT PERMITTED, CONSISTENT with IAS 2's own prohibition internationally.
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Subsequent Measurement – Lower of Cost and Net Realisable Value
The core measurement principle
At each Balance Sheet date, inventories are measured at the LOWER of COST and NET REALISABLE VALUE (NRV) – WHERE NRV has fallen BELOW cost, a PROVISION for inventory write-down (存货跌价准备) is recognised, with the CORRESPONDING charge recognised in the Income Statement.
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Determining Net Realisable Value
Estimated selling price, less costs to complete and sell
NET REALISABLE VALUE is the ESTIMATED selling price in the ORDINARY course of business, LESS the estimated costs of COMPLETION and the estimated costs NECESSARY to make the SALE – a forward-looking, MARKET-based estimate REQUIRING regular reassessment WHENEVER conditions change.
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Reversal of Inventory Write-Downs – Permitted
Where the circumstances causing the write-down no longer exist
WHERE the CIRCUMSTANCES that PREVIOUSLY caused an inventory write-down NO LONGER exist (e.g. the market price of the inventory has RECOVERED), the WRITE-DOWN is REVERSED – LIMITED to the AMOUNT of the ORIGINAL write-down – with the REVERSAL recognised as a REDUCTION in the current period's INVENTORY write-down expense. This REVERSAL is PERMITTED, CONSISTENT with IAS 2's own approach internationally.
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Contrast With ASBE 8's No-Reversal Rule for Other Assets
A genuinely different rule applies to long-lived assets
This REVERSAL permission is DISTINCT from the treatment of LONG-LIVED asset impairment under ASBE No. 8 (Impairment of Assets – see the companion poster), which PROHIBITS the reversal of impairment losses ONCE recognised for fixed assets, intangible assets, and GOODWILL. INVENTORIES are NOT subject to this NO-REVERSAL rule – a genuinely IMPORTANT distinction for PREPARERS to keep straight, since the TWO standards apply OPPOSITE reversal principles to DIFFERENT asset categories.
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Worked Example – Applying the Lower of Cost and NRV Rule
Recognising a write-down when NRV falls below cost
Example: A finished goods inventory with a falling market price
A company holds finished goods inventory with a cost of RMB 5,000,000. Due to a market downturn, the estimated selling price is now RMB 4,600,000, with estimated selling costs of RMB 200,000.
Net realisable value = RMB 4,600,000 − RMB 200,000 = RMB 4,400,000. Since NRV (RMB 4,400,000) is BELOW cost (RMB 5,000,000), the company recognises an inventory write-down of RMB 5,000,000 − RMB 4,400,000 = RMB 600,000, measuring the inventory at its LOWER NRV amount.
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Worked Example – Reversing a Prior Write-Down
Recovering value up to (but not beyond) the original cost
Example: A market price recovery in the following period
Continuing the prior example, in the following period, market prices recover, and the SAME inventory's net realisable value rises to RMB 4,800,000.
The company REVERSES the write-down, but ONLY up to the ORIGINAL cost of RMB 5,000,000 – recognising a reversal of RMB 5,000,000 − RMB 4,400,000 = RMB 600,000 (the FULL amount of the original write-down), REDUCING the current period's inventory write-down expense, WITHOUT recognising the inventory ABOVE its original RMB 5,000,000 cost.
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Disclosure Requirements
What ASBE No. 1 requires
Accounting policies adopted for inventories, including the cost formula usedCarrying amount of inventories, by classificationAmount of any inventory write-down recognised, and any reversal, as expense for the periodCarrying amount of inventories pledged as security for liabilities
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Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Whether an item is "ordinarily interchangeable," determining if specific identification or a cost formula applies
SIGNIFICANT ESTIMATES
Estimated selling price and costs to complete/sell, underlying the net realisable value calculationAllocation basis for production overheads included in processing cost
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Relationship to IAS 2 and US GAAP
Comparison – ASBE 1 vs IAS 2 vs US GAAP (ASC 330)
FeatureASBE 1IAS 2US GAAP
Measurement basisLower of cost and NRVLower of cost and NRV – convergedLower of cost and NRV (or market, for LIFO/retail method users)
LIFO permittedNOT permittedNOT permitted – convergedPERMITTED – a genuine US GAAP-specific divergence
Write-down reversalPERMITTED, up to original costPERMITTED, up to original cost – convergedNOT permitted once recognised
ASBE 1 is one of the MOST thoroughly converged standards with IAS 2 – the MEANINGFUL divergence here is between IFRS/ASBE on ONE side and US GAAP on the OTHER (LIFO availability, write-down reversal), rather than between China and the international standard.
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Statement Mapping
Where every inventory event lands
EventStatement(s) affectedNotes
Inventory carrying amountBSAt the lower of cost and net realisable value
Write-down / reversalISRecognised within cost of sales or a separate write-down expense line
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Related Standards
Cross-reference map
StandardConnection
ASBE No. 8Impairment of Assets – governs the DIFFERENT, no-reversal treatment applicable to fixed assets, intangibles, and goodwill
ASBE No. 15Construction Contracts – governs work-in-progress arising under construction contracts, outside this Standard's scope
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Quick-Reference Glossary
Net realisable value (NRV)
The estimated selling price in the ordinary course of business, less estimated costs of completion and costs necessary to make the sale.
Inventory write-down provision (存货跌价准备)
A provision recognised when an inventory item's net realisable value falls below its cost, reducing the inventory's carrying amount to NRV.
Financial statement key (Chinese GAAP / ASBE terminology)
BS Balance Sheet (资产负债表)
IS Income Statement (利润表)
SCOE Statement of Changes in Owners' Equity (所有者权益变动表)
CFS Cash Flow Statement (现金流量表)
History & Development
2006-02
ASBE No. 1 Inventories issued
Operative for periods beginning on or after 1 February 2007