Expired or damaged goods are unavoidable for businesses. So, when such goods are found, what should businesses do to include them as legitimate expenses? What documentation do businesses need to prepare?
1. Relevant legal documents
1.1. Accounting Standard No. 02
Vietnamese Accounting Standard No. 2 – Inventory stipulates:
"3. Net Realizable Value: This is the estimated selling price of inventory in the normal course of production and business minus (-) the estimated costs to complete the product and the estimated costs necessary for its sale.
19. At the end of the accounting year, when the net realizable value of inventory is less than its original cost, a provision for inventory devaluation must be established. The amount of the provision for inventory devaluation is the difference between the original cost of the inventory and its net realizable value. The provision for inventory devaluation is established on an item-by-item basis.
22. Raw materials, supplies, and tools and equipment held in inventory for use in product manufacturing shall not be valued below their original cost if the product they contribute to will be sold at or above the product's production cost. When there is a decrease in the price of raw materials, supplies, tools, and equipment, and the product's production cost is higher than its net realizable value, the inventory of raw materials, supplies, tools, and equipment shall be valued down to their net realizable value.
1.2. Circular 200/2014/TT-BTC - Guidance on the Enterprise Accounting System
Based on Article 45 – account 229 “Provision for asset losses”
1.5. Principles of accounting for inventory devaluation provisions
a) Businesses must establish provisions for inventory devaluation when there is reliable evidence of a decline in the net realizable value compared to the original cost of the inventory. The provision is an estimated amount to be included in production and business expenses for the portion of the inventory value that falls below its book value, and to compensate for actual losses incurred due to the devaluation of materials, products, and goods in inventory.
b) Provisions for inventory devaluation are established at the time of preparing the financial statements. The establishment of provisions for inventory devaluation must comply with the provisions of the Accounting Standard "Inventories" and the regulations of the current financial system.
c) Provisions for inventory devaluation must be calculated for each type of material, goods, and finished product in inventory. For work-in-progress services, provisions for inventory devaluation must be calculated for each service with its own separate price.
d) The net realizable value of inventory is the estimated selling price of the inventory in the normal course of production and business minus (-) the estimated costs to complete the product and the estimated costs necessary for selling them.
e) When preparing financial statements, based on the quantity, cost price, and net realizable value of each type of material, goods, and work-in-progress service, determine the provision for inventory devaluation that must be established:
– If the provision for inventory devaluation that needs to be established at the end of this accounting period is greater than the provision for inventory devaluation currently recorded in the accounting books, the excess amount is recorded as an increase in the provision and an increase in the cost of goods sold.
– If the provision for inventory devaluation that needs to be established at the end of this accounting period is less than the provision for inventory devaluation currently recorded in the accounting books, the smaller difference is reversed, reducing the provision and decreasing the cost of goods sold.
Circular 48/2019/TT-BTC - Guidance on the establishment and management of provisions.
Article 4. Provision for Inventory Impairment
The items for which provisions are made include raw materials, supplies, tools, equipment, goods, goods in transit, goods consigned for sale, goods in bonded warehouses, and finished goods (hereinafter referred to as inventory) whose original cost recorded in the accounting books is higher than their net realizable value and meets the following conditions:
– There must be legal invoices and documents as prescribed by the Ministry of Finance or other reasonable evidence to prove the cost of inventory.
– This refers to inventory owned by the business at the time of preparing the annual financial statements.
The provision amount is calculated using the following formula:
Inventory devaluation provision | = | Actual inventory levels at the time of preparing the annual financial statements. | x | Original cost of inventory as recorded in the accounting books. | - | Net realizable value of inventory |
In which:
– The cost of inventory is determined in accordance with Accounting Standard No. 02 – Inventory, issued together with Decision No. 149/2001/QD-BTC dated December 31, 2001, of the Minister of Finance, and any amendments, supplements, or replacements (if any).
– The net realizable value of inventory, as determined by the enterprise, is the estimated selling price of the inventory in the normal course of production and business at the time of preparing the annual financial statement minus (-) the estimated costs to complete the product and the estimated costs necessary for its sale.
At the time of preparing the annual financial statements, based on documents collected by the enterprise proving that the cost of inventory is higher than the net realizable value of the inventory, the enterprise shall make provisions for inventory devaluation as follows, in accordance with the provisions of Clauses 1 and 2 of this Article:
a) If the required provision equals the balance of the inventory devaluation provision already recorded in the accounting books from the previous year's report, the enterprise is not allowed to make additional provisions for inventory devaluation; b) If the required provision is higher than the balance of the inventory devaluation provision already recorded in the accounting books from the previous year's report, the enterprise shall make additional provisions for the difference in the cost of goods sold for the period.
c) If the required provision is lower than the balance of the inventory devaluation provision already set aside in the previous year's report and recorded in the accounting books, the enterprise shall reverse the difference and reduce the cost of goods sold in the current period.
d) The provision for inventory devaluation is calculated for each depreciated inventory item and aggregated into a detailed statement. This detailed statement serves as the basis for accounting for the cost of goods sold (the total cost of all products sold during the period) of the enterprise.
Handling of inventory for which provisions have been made:
a) Inventory damaged or destroyed due to natural disasters, epidemics, fires, outdated fashion, obsolete technology, obsolescence due to natural biochemical changes, expiration date, or loss of usability must be disposed of or liquidated.
b) Jurisdiction for handling the case:
Businesses establish a disposal council or hire a consulting firm with valuation functions to determine the value of inventory to be written off or liquidated. The inventory report determining the value of the disposed inventory, prepared by the business, clearly identifies the value of damaged inventory, the cause of damage, the type, quantity, and the recoverable value of inventory (if any).
The Board of Directors, Board of Members, Chairman of the company, General Director, Director, owner of a private enterprise, and owners of other economic organizations shall, based on the Minutes of the Handling Board or the proposal of a consulting organization with the function of appraising the value, and relevant evidence related to the inventory, decide on the disposal and liquidation; decide on the handling of responsibility of those involved in that inventory and be responsible for their decisions in accordance with the law.
- c) The actual loss for each type of unrecoverable inventory is the difference between the book value minus the value recovered from compensation from the party causing the damage, from insurance compensation, and from the sale of the inventory.
The actual loss value of unrecoverable inventory, after being offset by the inventory devaluation reserve, is accounted for in the cost of goods sold of the enterprise.
2. Instructions for implementation
Based on the regulations mentioned above, the Ministry of Finance has also issued a document addressing the concerns of businesses as follows:
- At the end of the accounting period, if the enterprise determines simultaneously: (1) there is a decrease in the value of raw materials used for the purpose of producing products and (2) the production cost of the product (produced from those raw materials) is higher than the net realizable value of the product, then the enterprise must make a provision for inventory devaluation for the raw materials used for that production purpose. Thus, if the production cost of the product (the cost of inventory produced from the reduced raw materials) is still less than the net realizable value, then the enterprise does not make a provision for inventory devaluation for those raw materials.
- The provision for inventory devaluation (including raw materials used for the normal production and business activities of the enterprise) is made in accordance with the guidelines in Point 1.5, Clause 1, Article 45 of Circular 200/2014/TT-BTC and Article 4 of Circular 48/2019/TT-BTC.
- Determining the net realizable value of inventory: Based on the regulations mentioned above, at the end of the accounting year, the enterprise, taking into account the specifics of its production and business operations, and the information and evidence regarding the value of inventory, independently estimates the selling price of inventory, the cost to complete the product, and the necessary costs for sales as a basis for determining the net realizable value of inventory.
So, At the time of preparing the annual financial statements, based on documents collected by the enterprise proving that the cost of inventory is higher than the net realizable value of the inventory, the enterprise shall, in accordance with the above regulations, make provisions for inventory devaluation and include it as a deductible expense when calculating taxes.