IPSAS 12 Inventories | StandardsHub

IPSAS 12 Inventories is the current, active standard issued by the IPSASB for measuring and disclosing inventories. Effective for annual financial statements covering periods beginning on or after 1 January 2008 (earlier application encouraged); comprehensively amended by IPSAS 46 (fair value disclosures) and the November 2024 Stripping Costs amendment (effective 2027).

IPSAS 12 is based on IAS 2 Inventories, adapted for the public sector with a replacement-cost measurement for give-away inventory, fair-value-at-acquisition cost for non-exchange acquisitions, and an authoritatively embedded stripping-costs appendix for extractive industries.

Objective, Scope & Definitions (paras. 1–9)

Objective & scope

Prescribes the accounting treatment for inventories – primarily how much cost to recognize as an asset and carry forward until the related revenue is recognized, including any write-down to net realizable value, and which cost formulas to use.

Financial instruments (IPSAS 28 / 41) Biological assets and agricultural produce AT THE POINT OF HARVEST (IPSAS 27) Work-in-progress of services provided for NO or NOMINAL consideration directly from recipients – a public-sector-specific exclusion not found in IAS 2

Producers of agricultural/forest products or minerals measured at NRV under well-established industry practice, and commodity broker-traders measuring at fair value less costs to sell, are excluded only from the MEASUREMENT requirements (paras. 3, 7–8).

Key definitions (para. 9)

Inventories

Assets: materials/supplies to be consumed in production or service rendering; held for sale/distribution in the ordinary course of operations; or in the process of production for sale/distribution.

Net realizable value (NRV)

Estimated selling price in the ordinary course of operations, less estimated costs of completion and costs necessary to make the sale/exchange/distribution.

Current replacement cost

The cost the entity would incur to acquire the asset on the reporting date.

NRV is entity-specific; fair value is not – NRV for inventories may NOT equal fair value less costs of disposal (para. 10).

Public Sector Inventory Types (paras. 11–14A)

Distinctive public sector examples (para. 12)

Military inventories (single-use – ammunition, missiles, rockets, bombs) Consumable stores; maintenance materials; spare parts (other than those under IPSAS 45) Strategic stockpiles (e.g. energy reserves) Stocks of unissued currency; postal supplies held for sale (e.g. stamps) Work-in-progress – training materials, arm's-length client services (e.g. audits) Land/property held for sale

Special measurement notes

Currency and postage stamps: recognized as inventory NOT at face value, but at printing/minting cost (para. 13) Strategic stockpiles held for emergencies: recognized as inventory and treated accordingly (para. 14) Missiles that satisfy IPSAS 45 criteria may be classified there instead of as military inventory (para. 14A)

Goods purchased/produced for distribution to other parties at no charge (a TRANSFER EXPENSE) or nominal charge also count as inventories – e.g. educational books donated to schools (para. 11).

Measurement – Lower of Cost and NRV / Replacement Cost (paras. 15–17)

The three measurement pathways

Default: Inventories = LOWER of Cost and Net Realizable Value

Acquired via a NON-EXCHANGE transaction → cost = fair value at the acquisition date (para. 16) Held for distribution at no/nominal charge, or consumed to PRODUCE goods for no/nominal-charge distribution → LOWER of cost and CURRENT REPLACEMENT COST, not NRV (para. 17)

Why replacement cost, not NRV, for give-away inventory

When goods will be distributed for free or a token amount, "net realizable value" (a selling-price concept) makes no sense – there's no meaningful sale. Instead, IPSAS 12 measures the future economic benefit/service potential by what it would COST to replace that capacity, since that's the resource commitment the entity is really managing (para. 43).

Cost of Inventories (paras. 18–29)

Three cost components (para. 18)

Costs of purchase – price, import duties/non-recoverable taxes, directly attributable transport/handling – LESS trade discounts, rebates Costs of conversion – direct labor, plus a systematic allocation of fixed/variable production overheads Other costs – only to the extent incurred bringing inventories to their present location/condition (e.g. non-production overheads, customer-specific design costs)

Fixed overhead allocation – the "normal capacity" rule (para. 21)

Fixed overhead per unit = Total fixed production overhead ÷ NORMAL capacity (not actual, if abnormally low)

LOW/idle production → do NOT increase the overhead allocated per unit; unallocated overhead is expensed immediately ABNORMALLY HIGH production → DECREASE the per-unit allocation, so inventory isn't carried above cost Variable overheads → allocated based on ACTUAL use of production facilities

Costs EXCLUDED and expensed as incurred: abnormal waste, storage costs (unless a necessary production stage), non-contributing admin overheads, and selling costs (para. 25).

Joint products, deferred settlement & non-exchange acquisition

Joint/by-products with non-separable conversion costs → allocated on a rational, consistent basis (e.g. relative sales value); immaterial by-products often measured at NRV, deducted from the main product's cost (para. 23) Deferred settlement terms with a financing element → the financing component is recognized as INTEREST EXPENSE over the financing period, not as part of inventory cost (para. 27) Inventory transferred via a non-exchange transaction (e.g. donated medical supplies after a disaster) → cost = fair value at the acquisition date (para. 31)

Cost Formulas – FIFO & Weighted Average (paras. 32–37)

Specific identification – non-interchangeable items

Required for items NOT ordinarily interchangeable, and goods/services segregated for specific projects – regardless of whether bought or produced. INAPPROPRIATE for large numbers of interchangeable items, since it would let management cherry-pick which costs remain in inventory to manipulate surplus/deficit.

FIFO or weighted average – for everything else

FormulaMechanics

FIFOItems purchased/produced FIRST are assumed sold first; ending inventory = most RECENTLY acquired items

Weighted averageCost per item = weighted average of opening inventory + purchases/production during the period; recalculated periodically or on each new shipment

The SAME cost formula must be used for all inventories of similar nature/use. Different formulas can be justified for genuinely different-use inventories (e.g. different business segments) – but GEOGRAPHIC location alone is never sufficient justification (para. 34).

Net Realizable Value & Write-Downs (paras. 38–42)

Item-by-item, not by broad category

Inventories are usually written down to NRV on an ITEM-BY-ITEM basis. Grouping is acceptable only for genuinely similar/related items with the same purpose that can't practicably be evaluated separately – NOT a broad classification like "all finished goods" or "everything in one geographic segment" (para. 39).

NRV estimates reflect the PURPOSE the inventory is held for – e.g. inventory covered by a firm sales contract is valued at the CONTRACT price, not general selling prices, for that quantity (para. 40).

Reversal of a prior write-down (para. 42)

Reversal is capped at the ORIGINAL write-down amount – new carrying amount = lower of cost and revised NRV

A fresh NRV assessment is made EVERY period. If the circumstances that caused the write-down no longer exist, or NRV has clearly increased, the write-down is reversed – but never above the original cost.

Raw materials/supplies aren't written down below cost if the finished products they'll go into are still expected to sell at or above cost – UNLESS a material price decline signals the finished product itself will sell below cost (para. 41).

Distributing Goods at No Charge or a Nominal Charge (para. 43)

Service potential, not cash-generating ability, drives the value

Where a government has decided to distribute goods free or at a nominal charge, their future economic benefit for financial reporting isn't about generating cash – it's the amount the entity would need to PAY to re-acquire that service potential, if that were necessary to meet its objectives.

Economic benefits/service potential can be acquired in the market → use that market replacement cost Cannot be acquired in the market → an ESTIMATE of replacement cost must be made If the PURPOSE for holding the inventory later changes (e.g. from give-away to sale) → re-measure using the ordinary para. 15 rule (lower of cost and NRV) going forward

Recognition as an Expense (paras. 44–46)

The matching principle

Sold, exchanged, or distributed WITH related revenue → carrying amount expensed in the SAME period the revenue is recognized Distributed with NO related revenue (a transfer expense) → expensed per IPSAS 48, Transfer Expenses Write-downs and inventory LOSSES → expensed in the period the write-down/loss occurs Reversal of a write-down → REDUCES the expense recognized in the period of reversal

Timing for service providers & capitalized inventory

For a service provider, inventory typically becomes an expense when services are RENDERED, or upon billing for chargeable services (para. 45). Inventory allocated into ANOTHER asset (e.g. materials used in self-constructed PP&E) is instead expensed over that OTHER asset's useful life, via depreciation (para. 46).

Disclosure Requirements (paras. 47–50C)

Core disclosures (para. 47)

Accounting policies for measuring inventories, including the cost formula used Total carrying amount, and amounts by classification (merchandise, supplies, materials, WIP, finished goods) Carrying amount of inventories at fair value less costs of disposal Amount recognized as an expense during the period Write-down amount recognized as an expense, and any reversal amount, with the circumstances that led to the reversal Carrying amount of inventories pledged as security for liabilities

Fair value disclosures (paras. 50A–50C, added via IPSAS 46)

For inventories measured at FAIR VALUE after initial recognition, disclose enough to let users assess the measurement techniques/inputs used, and – for Level 3 (significant unobservable inputs) – the effect on surplus/deficit or net assets/equity.

The fair value measurement at period end, and (for non-recurring measurements) the reason The fair value hierarchy LEVEL (1, 2, or 3) Measurement technique(s) and inputs, with reasons for any technique change Level 3 reconciliation from opening to closing balances, by type of change

Effective Date & Amendment Timeline

Amendment history at a glance

Base Standard: periods beginning on/after 1 January 2008. Comprehensively amended over time – notably by IPSAS 46 (Measurement, fair value disclosures) and, most recently, the November 2024 Stripping Costs amendment.

EffectiveChange

1 Jan 2017Various – Improvements to IPSAS 2015: military inventory terminology aligned to GFS "military inventories"

1 Jan 2018The Applicability of IPSAS – GBE terminology changes

1 Jan 2025IPSAS 46, Measurement – fair value disclosure package (§9)

1 Jan 2027New paras. 62H–62I – Stripping Costs in the Production Phase of a Surface Mine (Amendments to IPSAS 12), issued Nov 2024

The Stripping Costs amendment (2027 effective date) brings IPSAS 12 into alignment with IFRIC 20-equivalent guidance for extractive-sector stripping activity, via an authoritative Appendix.

Relationship to IAS/IFRS – Comparison with IAS 2

Comparison – IPSAS 12 vs IAS 2

IPSAS 12 is drawn primarily from IAS 2 (Revised 2003), Inventories.

TopicDifference

DefinitionIPSAS 12's definition reflects that some public sector inventories are distributed at no/nominal charge – IAS 2's does not

ScopeIPSAS 12 explicitly excludes no/nominal-charge service work-in-progress

Current replacement costAdditional defined term not present in IAS 2

Non-exchange acquisitionIPSAS 12 requires fair-value-at-acquisition cost – no IAS 2 equivalent (non-exchange transactions don't arise in for-profit entities the same way)

No/nominal-charge inventoryValued at lower of cost and CURRENT REPLACEMENT COST – a public-sector-specific rule

Stripping costs guidanceIPSAS 12 embeds IFRIC 20-equivalent principles AUTHORITATIVELY in an appendix; under IFRS, IFRIC 20 is a separate pronouncement

Terminology"Statement of financial performance" (IPSAS 12) vs "income statement" (IAS 2); IPSAS 12 does not use "income"

Statement / Process Mapping

Measurement decision map

How was the inventory acquired? EXCHANGE → cost basis (§4). NON-EXCHANGE → fair value at acquisition (§3)
What is it held FOR? Ordinary sale → lower of cost and NRV. Distribution at no/nominal charge (or production toward that) → lower of cost and CURRENT REPLACEMENT COST (§3, §7)
Are the items ordinarily interchangeable? No (segregated/unique) → SPECIFIC IDENTIFICATION. Yes → FIFO or WEIGHTED AVERAGE, consistently applied (§5)
Has NRV/replacement cost fallen below carrying cost? → write down, expense the difference (§6). Has it since recovered? → reverse, capped at the original write-down (§6)
Is the inventory measured at FAIR VALUE (not cost)? → apply the IPSAS 46 fair value hierarchy disclosures (§9)

Concept-to-statement mapping table

IPSAS 12 conceptStatement(s)Notes

Inventory carrying amountSOFPLower of cost and NRV/replacement cost

Cost of inventories sold/exchanged/distributedSOFPerfMatched to the period revenue is recognized

Write-downs & reversalsSOFPerfExpensed / reduces expense, in the period they occur

Distribution with no related revenueSOFPerfGoverned by IPSAS 48, Transfer Expenses

Cost formula, classifications, pledged inventoryNotesMandatory per para. 47

Related Standards – Cross-Reference Map

How IPSAS 12 connects across the IPSAS body of literature

StandardNature of the connection

IPSAS 5Limited circumstances where borrowing costs are included in inventory cost (§4)

IPSAS 19Provisions/contingent liabilities from firm sales or purchase contracts exceeding inventory quantities (§6)

IPSAS 27Agricultural produce harvested from biological assets – initial cost is fair value less costs to sell at harvest (§4)

IPSAS 28 / 41Financial instruments – excluded from IPSAS 12's scope entirely (§1)

IPSAS 45Spare parts for plant/equipment dealt with there instead, unless they meet IPSAS 12's own inventory definition (§2)

IPSAS 46Fair value measurement and disclosure framework underpinning §9

IPSAS 47Costs to fulfill a binding arrangement that don't create inventory (or another asset) are accounted for under IPSAS 47 instead (§2)

IPSAS 48Transfer Expenses – governs expense recognition when inventory is distributed with no related revenue (§8)

Quick-Reference Glossary

Net realizable value

Estimated selling price in the ordinary course of operations, less estimated completion and selling costs.

Current replacement cost

What the entity would need to pay to acquire the asset on the reporting date.

FIFO

First-in, first-out – assumes earliest-purchased items are sold first; ending inventory reflects the most recent purchases.

Weighted average cost formula

Cost per item derived from the weighted average of similar items held at the start of the period plus those purchased/produced during it.

Normal capacity

Production expected to be achieved on average over a number of periods/seasons under normal circumstances, net of planned maintenance downtime.

Exchange / non-exchange transactions

Exchange: approximately equal value given both ways. Non-exchange: value flows one way without equal value returned.

Financial statement key

SOFP Statement of financial position SOFPerf Statement of financial performance Notes Notes to the financial statements