Inventory Treatment

Increased cost to ship inventory due to Covid 19

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Due to the current Covid 19 pandemic we are seeing higher costs associated with air freight to get goods to the place of sale.  Under normal FRS102 treatment these costs would form part of the inventory value sitting on the balance sheet.  Questions are now being raised around stripping these costs out and using the business as usual cost to value the inventory.  The logic being that they don't want to take the higher cost of goods into the next year (year end July) which would then distort the profits for that year and margins.  The proposal is to take the higher costs as exceptional.  Is this allowable treatment?  Thanks all and stay safe.

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By paul.benny
30th Mar 2020 16:35

Presumably you're airfreighting goods because you can sell them now. On that basis, they will have sold through by July and won't form part of the year end valuation anyway.

That said, you approach seems entirely reasonable and I would have no hesitation about expensing the additional freight costs in the current year.

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By kjones1986
30th Mar 2020 18:10

thanks for the response. Yes that should be the base that the goods would be sold by then. Assuming however this wasn't the case, would the higher costs not form part of the year end valuation based on FRS102 as these are the costs associated with getting the goods to point of sale? Appreciate I maybe missing something here as to why the increased costs can be expensed.

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Replying to kjones1986:
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By paul.benny
31st Mar 2020 11:16

Whilst the scenario isn't explicitly catered for in FRS102, I would look to the provisions in 13.13 (a) which refer to exclusion of abnormal costs.

It's likely that you're using some sort of standard costing to attribute freight costs to stock (ie averaging the costs in some way) Para 13.16 mentions normal levels of activity. Airfreighting is abnormal and therefore the additional costs should be excluded.

Stepping back from inventory valuation, the airfreight cost is clearly a response to the current situation. The matching concept suggests it should be recognised in the current year.

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By kjones1986
30th Mar 2020 18:10

thanks for the response. Yes that should be the base that the goods would be sold by then. Assuming however this wasn't the case, would the higher costs not form part of the year end valuation based on FRS102 as these are the costs associated with getting the goods to point of sale? Appreciate I maybe missing something here as to why the increased costs can be expensed.

Thanks (0)