Vietnamese Public Sector Accounting Standard No. 12 “Inventories” according to Decision 1676/QD-BTC dated September 1, 2021

APPENDIX NO. 03

VIETNAMESE PUBLIC ACCOUNTING STANDARD NO. 12
INVENTORY
(Attached to Decision No. 1676/QD-BTC dated September 1, 2021 of the Ministry of Finance)

INTRODUCTION

The Vietnamese public accounting standards system was researched and developed by the Public Accounting Standards Drafting Committee under the Ministry of Finance to ensure compliance with international accounting practices and suitability to the actual conditions of Vietnam. Vietnamese public accounting standards share the same standard designations as their corresponding international public accounting standards.

Vietnamese Public Sector Accounting Standard (VPSAS) No. 12 "Inventory" This document is drafted based on International Public Sector Accounting Standard (IPSAS) No. 12. "Inventory" and current regulations on Vietnam's financial and budgetary mechanisms. Vietnamese Public Sector Accounting Standard No. 12 stipulates provisions consistent with current Vietnamese legal regulations and provisions that may be amended or supplemented in the future. Vietnamese Public Sector Accounting Standard No. 12 does not stipulate provisions of International Public Sector Accounting Standard No. 12 that are inconsistent with the long-term financial and budgetary mechanisms; any additions will be made based on the actual situation in each appropriate period.

International Public Sector Accounting Standard No. 12, issued in 2003 and amended to conform with other international public sector accounting standards as of December 31, 2018, is the basis for the International Public Sector Accounting Standards Board (IPSASB).

Vietnamese Public Sector Accounting Standard No. 12 uses paragraph numbering that differs from International Public Sector Accounting Standards. For comparison, a table of paragraph numbering references for Vietnamese Public Sector Accounting Standard No. 12 is included with this standard. For content relating to other public sector accounting standards, Vietnamese Public Sector Accounting Standard No. 12 cites the symbols and names of the relevant published Vietnamese public sector accounting standards. For standards not yet published, this standard only states the name of the standard or the relevant content to be referenced, without citing the numbers of the relevant standards as in International Public Sector Accounting Standard No. 31. Specific citations of the symbols and names of the standards will be made after the relevant standards are published.

At the time of the issuance of Vietnamese Public Sector Accounting Standard No. 12 (2021), the following related standards had not yet been issued:

STT	Name of public accounting standard	The section contains referenced content.
1	Construction contract	2 (a)
2	Financial tools: Presentation	2 (b)
3	Financial tools: Recording and measuring	2 (b)
4	Agriculture	2(c); 26
5	Revenue from exchange transactions	8
6	Borrowing costs	23
7	Provisions, contingent liabilities, and contingent assets.	37

 

VPSAS 12 – INVENTORY

The process of issuing and updating Vietnamese Public Sector Accounting Standard No. 12
(hereinafter referred to as the Standard)

Version 12 of the Vietnamese Public Sector Accounting Standard was first issued under Decision No. 1676/QD-BTC dated September 1, 2021, by the Minister of Finance.

This standard came into effect on September 1, 2021, and is applicable from September 1, 2021.

The following standards are in effect:

– Vietnamese Public Sector Accounting Standard No. 01: Presentation of Financial Statements;

– Vietnamese Public Sector Accounting Standard No. 02: Cash Flow Statement;

– Vietnamese Public Sector Accounting Standard No. 17: Property, Plant and Equipment;

– Vietnamese Public Sector Accounting Standard No. 31: Intangible Assets.

 

VPSAS 12 – INVENTORY

CONTENT

The content of Vietnamese Public Sector Accounting Standard No. 12 "Inventories" is presented from paragraph 1 to paragraph 46. All paragraphs are equally valid.

I. GENERAL PROVISIONS

Purpose

Limit

Define

Net realizable value

Inventory

II. SPECIFIC REGULATIONS

Determine the value of inventory.

Original cost of inventory

Purchase cost

Processing costs

Other costs

Cost of inventory held by the service provider.

The original cost of agricultural products harvested from biological assets.

Techniques for determining the cost of inventory

Pricing method

Net realizable value

Goods are distributed free of charge or at nominal price.

Record the cost

Presenting information

Reference table of paragraphs of Vietnamese public sector accounting standards compared with paragraphs of international public sector accounting standards.

 

I. GENERAL PROVISIONS

Purpose

1. The purpose of this standard is to prescribe the accounting method for inventory. The fundamental issue in inventory accounting is that the cost components of inventory are recognized as assets and continue to be recognized as assets until related revenue is recognized. This standard provides guidance on determining the cost of inventory and its subsequent recognition as an expense, including the reduction of inventory value to its net realizable value. This standard also provides guidance on the inventory valuation methods used to determine inventory value.

Limit

2. Entities that prepare and present financial statements on an accrual accounting basis apply this standard to account for all types of inventory, except for:

(a) Work-in-progress costs arising from construction contracts, including directly related service contracts;

(b) Financial instruments;

(c) Biological assets related to agricultural activities and agricultural products at the time of harvest; and

(d) Work-in-progress costs of services provided free of charge or at nominal price.

3. This standard does not apply to the valuation of inventory held by:

(a) Units producing agricultural and forestry products, post-harvest agricultural products, minerals and mineral products, the value of these products is determined at net realizable value in accordance with the specific regulations of these industries. When these types of inventories are determined at net realizable value, changes in net realizable value are recognized in surplus or deficit in the reporting period in which the change occurs; and

(b) The trading unit – commodity broker – determines the value of inventory at fair value less costs of sale. When these inventories are determined at fair value less costs of sale, changes in fair value less costs of sale are recognized in a surplus or deficit in the reporting period in which the change occurs.

4. The inventories referred to in paragraph 3(a) are determined at their net realizable value at certain stages of the production process. For example, when agricultural crops are harvested or when minerals are extracted and sales are secured by a forward contract or government guarantee; or when a market exists and there is virtually no risk of unsold goods. These types of inventories are outside the scope of the valuation provisions of this standard.

5. Trading and brokerage entities are entities that buy or sell goods to other entities or to themselves. The inventory referred to in paragraph 3(b) is essentially purchased with the intention of reselling in the near future and generating a surplus from price fluctuations or profit margins of the trading and brokerage entity. Inventory determined at fair value less cost of goods sold is not within the scope of the valuation provisions of this standard.

Define

6. The terms used in this standard are understood as follows:

Current replacement cost is the cost an entity incurs to acquire an asset at the reporting date.

Net realizable value is the estimated selling price under normal operating conditions minus the estimated costs to complete the product and the estimated costs necessary for selling, exchanging, or distributing it.

Inventory consists of the following assets:

(a) Having the form of raw materials or tools and equipment consumed in the production process;

(b) Takes the form of raw materials or consumable tools and equipment distributed in the process of providing services;

(c) Held for sale or distribution in a normal operating cycle; or

(d) In the process of being manufactured for sale or distribution.

Terms defined in other Vietnamese public sector accounting standards used in this standard have the same meaning as in those standards.

Net realizable value

7. Net realizable value is the net unit value that an inventory is expected to receive when sold under normal operating conditions. Fair value reflects the value at which similar inventory would be exchanged between a seller and a buyer who have reasonable knowledge and willingness to do so. Net realizable value is determined by the specifics of the unit, whereas fair value is not. The net realizable value of inventory may not equal its fair value minus the cost of sale.

Inventory

8. Inventory includes goods purchased and held for resale, such as goods acquired and held by the entity for sale, or real estate held for sale. Inventory also includes finished goods or work-in-progress in production. It also includes raw materials and tools and equipment prepared for use in production; and goods purchased or produced by the entity for free distribution or at nominal price to other entities. In some public sector entities, inventory relates more to the provision of services than to goods purchased and held for resale or goods produced for sale. In the case of a service provider, as mentioned in paragraph 24, inventory includes the cost of performing the service for which the entity has not yet recognized revenue.

9. Public sector inventory may include:

(a) Inventory warehouse;

(b) Maintenance materials;

(c) Spare parts for factory buildings and equipment, other than those specified in the standards on real estate, factory buildings and equipment;

(d) Strategic reserves (e.g., energy reserves, food reserves, rescue equipment;

(e) Unissued cash reserves;

(f) Goods intended for provision in postal services held for sale (e.g., postage stamps);

(g) Work in progress costs, including:

(i) Training course materials;

(ii) Customer services, when these services are provided at par;

(h) Real estate held for sale.

10. Because the government holds the power to print and issue currency and postage stamps, these assets are recognized as inventory for the purposes of this standard. These types of inventory are not reported at face value but are valued according to paragraph 12 of this standard, i.e., at their printing or minting cost.

11. When the Government maintains strategic reserves for various goods, such as energy reserves (gasoline, oil), food reserves (rice) for use in emergencies or other situations (e.g., natural disasters or other emergency civil relief), these strategic reserves are recognized and treated as inventory for the purposes of this standard.

II. SPECIFIC REGULATIONS

Determine the value of inventory.

12. Inventory is valued at the lower of cost and net realizable value, except as provided in paragraph 13 or paragraph 14 of this standard.

13. When inventory is acquired through a non-exchange transaction, the value of the inventory is determined at its fair value on the date of acquisition.

14. Inventory must be valued at the lower of its original cost and current replacement cost when the inventory is held for:

(a) Distributed free of charge or at nominal price; or

(b) Consumptions in the production of goods that are distributed free of charge or at nominal price.

Original cost of inventory

15. The original cost of inventory includes all purchase costs, processing costs, and other expenses incurred to bring the inventory to its current location and condition.

Purchase cost

16. The cost of purchasing inventory includes the purchase price, import duties and other taxes (excluding those subsequently reimbursed by the state budget), transportation, loading and unloading costs, and other costs directly related to obtaining finished goods, raw materials, and tools and equipment. Trade discounts, rebates, and similar items are deductible from the cost of purchase.

Processing costs

17. Processing costs incurred in converting work-in-process inventory into finished goods inventory arise at production units. Processing costs include expenses directly related to each unit of product, such as direct labor costs. Processing costs encompass both the systematically allocated fixed and variable manufacturing overhead costs incurred during the process of converting work-in-process inventory into finished goods inventory. Fixed manufacturing overhead costs are relatively stable indirect manufacturing costs that do not depend on the scale of production (such as depreciation and maintenance costs of plants and equipment) and administrative costs. Variable manufacturing overhead costs are indirect manufacturing costs that change directly or nearly directly with the scale of production, such as indirect labor costs and indirect material costs.

18. The allocation of fixed manufacturing overhead costs to processing costs is based on the normal capacity of machinery and equipment. Normal capacity is the average number of products expected to be produced over a period or season under normal production conditions, taking into account any capacity loss due to planned maintenance. Actual production levels may be used as an allocation criterion if they approximate normal capacity. Fixed manufacturing overhead costs allocated to each unit of product will not increase when production is reduced or ceases. Unallocated manufacturing overhead costs will be recognized as expenses in the period in which they are incurred. In periods where actual production is higher than normal, fixed manufacturing overhead costs are allocated to each unit of product at the actual cost incurred, thus inventory is not valued higher than the actual cost. Variable manufacturing overhead costs are fully allocated to each unit of product based on the actual production level of the machinery and equipment.

19. A production process can produce multiple products simultaneously. For example, this can occur when producing combined products or when the process creates a main product and a by-product. When the processing costs for each product cannot be separately accounted for, they are allocated to the products on a reasonable and consistent basis. This allocation can be based on the corresponding selling price of each product at a stage in the production process, when the products can be individually identified, or when the production process is complete. Most by-products are inherently non-material. In this case, the by-products are determined at their net realizable value, which is then subtracted from the cost of the main product. Therefore, the book value of the main product will not differ significantly from its processing cost.

Other costs

20. Other costs are included in the cost of inventory only if those costs are incurred to bring the inventory to its current location and condition. For example, the cost of inventory may include overhead costs outside of production or the cost of designing products for specific customers.

21. Examples of costs that are not included in the cost of inventory and are recognized as expenses in the period in which they are incurred are:

(a) Costs of materials, labor, or other production expenses that are above normal levels;

(b) Storage costs, unless these costs are necessary in the production process before a subsequent production stage;

(c) Management costs not related to bringing inventory to its current location and condition; and

(d) Cost of goods sold.

22. In some cases, borrowing costs are included in the cost of inventory in accordance with the provisions of the Vietnamese Public Sector Accounting Standard on borrowing costs.

23. The entity may purchase inventory on deferred payment terms. When the purchase transaction includes a financial element, that financial element (for example, the difference between the purchase price under cash payment and the purchase price under deferred payment) is recognized as interest expense in the deferred payment period.

Cost of inventory held by the service provider.

24. In cases where service providers have inventory (excluding the inventory referred to in paragraph 2(d)), the value of the inventory is determined by the cost of producing it. These costs essentially include labor costs and other personnel costs directly related to the provision of the service, including supervisory staff costs and other general production costs. Labor costs unrelated to the provision of the service are not included in the cost of inventory. Labor and other costs related to sales and administrative staff costs are not included in the cost of inventory but are recognized as expenses in the period in which they are incurred. The cost of inventory of a service provider does not include surplus profit or other unrelated general costs that are typically included in the price of the service.

The original cost of agricultural products harvested from biological assets.

25. Inventory comprising agricultural products harvested by the entity from biological assets shall be initially recognized at fair value less cost of sale at the time of harvest. This is the original cost of inventory at the date of harvest for the application of this standard.

Techniques for determining the cost of inventory

26. Inventory costing techniques, such as the standard cost method or the retail method, may be used for convenience if they yield results that approximate the original cost. The standard cost method takes into account the normal consumption of materials, tools, labor, and the efficiency and capacity utilization of machinery and equipment. These factors are periodically reviewed and, as necessary, adjusted to reflect current conditions.

27. Inventory may be transferred to the entity through a non-exchange transaction. For example, an international aid organization may provide medical supplies to a public hospital during disaster relief efforts. In this case, the cost of the inventory is its fair value at the time of receipt.

Pricing method

28. The original cost of inventory (which is typically non-interchangeable) and goods or services produced, set aside for specific projects, is determined using the object-specific identification method.

29. The specific identification method is the price associated with specific types of inventory. This method is suitable for inventory items that are specifically allocated to a particular project, regardless of whether the inventory is produced or purchased. However, the specific identification method is not suitable for valuing large quantities of inventory that are typically interchangeable. In this case, a method of selecting the remaining inventory items at the end of the period can be used to determine the expected impact on the surplus or deficit for the period.

30. When applying paragraph 29, the entity must use the same valuation method for all inventory of the same nature and purpose for which it is used. For inventory of different nature or purpose (e.g., the same type of goods used in different departments), a different valuation method may be applied. Differences in the geographical location of the inventory are not sufficient grounds to justify the use of different valuation methods.

31. The cost of inventory, except for the method referred to in paragraph 28, is determined by the first-in, first-out (FIFO) method or the weighted average method. The entity must use the same valuation method for all inventory of the same nature and purpose to which it is used. For inventory of different natures or purposes, different valuation methods may be applied.

32. For example, inventory used for one department may have a different use than the same type of inventory used for another department within the same unit. However, the geographical difference in inventory is not inherently sufficient to justify the application of different valuation methods.

33. The first-in, first-out (FIFO) method assumes that inventory purchased first is sold first; therefore, the remaining inventory at the end of the period consists of the inventory purchased or produced most recently. In the weighted average method, the cost of goods sold for each item is determined based on the weighted average price of similar items at the beginning of the period and the price of items purchased or produced during the period. The average value can be calculated for the entire period or after each purchase, depending on the entity's circumstances.

Net realizable value

34. The cost of inventory may not be recoverable if the inventory is damaged, partially or wholly obsolete, or if the selling price is reduced. The cost of inventory may also not be recoverable if the estimated cost to complete and the estimated cost to sell, exchange, or distribute increase. Writing down the cost of inventory to its net achievable value is consistent with the principle that assets should not be recognized at a level higher than the future economic benefits or potential services that the entity anticipates it may obtain from selling, exchanging, distributing, or using the asset.

35. Inventory write-downs to net realizable value are typically performed on a per-item basis. However, in some cases, the entity may write down an entire group of similar or related items. This applies to inventory items that share a common purpose and end use; their value should not be assessed separately from other items in the same product line. Writing down inventory based on a single item is inappropriate, for example, for finished goods, or for all inventory items within a specific process or geographic location. Service providers often aggregate costs for each service with a separate selling price, with each service considered a separate item.

36. When estimating the net realizable value, the entity must take into account the purpose for which the inventory is held. For example, the net realizable value of an inventory held for sale or service under contract must be based on the selling price stipulated in the contract. If the inventory held exceeds the amount under contract, the net realizable value of the difference must be based on the estimated normal selling price. Guidance on how to handle provisions or contingent liabilities, such as inventory arising from signed sales contracts exceeding the inventory held and the amount under signed purchase contracts, is presented in the Vietnamese Public Sector Accounting Standard on Provisions, Contingent Liabilities and Contingent Assets.

37. Raw materials and tools held for use in product manufacturing shall not be written down below their original cost if the product they contribute to will be sold, exchanged, or distributed at or above the cost of that product. However, when a decrease in the price of raw materials results in the cost of the manufactured product being higher than its net realizable value, these raw materials must be written down to their net realizable value. In this case, using the current replacement cost of the raw materials may be the best method to determine the net realizable value.

38. The entity must reassess the net realizable value at each subsequent accounting period. When the previous reasons for the inventory write-down below cost no longer exist, or when there is conclusive evidence that the net realizable value has increased due to changes in economic conditions, the previously written-down amount must be reversed (the maximum amount that can be reversed is the original write-down amount) to ensure that the new book value is the lower of the original cost and the adjusted net realizable value. For example, in the previous accounting period, inventory was written down below net realizable value due to a decrease in its selling price; in the following accounting period, the selling price increased, and the entity still holds that inventory.

Free delivery or delivery at nominal price.

39. A public sector entity may hold inventory with future economic benefits or potential services not directly related to its ability to generate net cash inflows. Such inventory may arise when the government decides to distribute certain goods free of charge or at nominal prices. In these cases, the future economic benefits or potential services of the inventory for financial reporting purposes are reflected in the amount the entity would have to spend to obtain the economic benefits or potential services necessary to achieve its objectives. When the economic benefits or potential services are not available on the market, the entity must make an estimate of the replacement cost. If the purpose of holding the inventory changes, the inventory is valued in accordance with paragraph 12.

Record the cost

40. When inventory is sold, exchanged, or distributed, the carrying value of the inventory is recognized as an expense in the period in which the related revenue is recognized. If no related revenue is generated, the expense is recognized when the goods are distributed or when the related service is provided. Inventory write-downs and any inventory losses are recognized as expenses in the period in which the write-down or loss occurs. The reversal of a write-down in inventory will be recognized as an expense deduction in the period in which the reversal occurs.

41. For a service provider, inventory is typically recognized as an expense when the service has been provided or an invoice for the service has been issued.

42. Certain types of inventory may be allocated to other assets, for example, inventory used as part of real estate, factory buildings, and homemade equipment. Inventory allocated to other assets in this way is recognized as an expense over the useful life of that asset.

Presenting information

43. Financial statements must present the following information:

(a) Accounting policies applied in determining the value of inventory, including the valuation methods used;

(b) The total book value of inventory and the book value of each inventory category as appropriate to the entity;

(c) The book value of inventory is determined at fair value less cost of goods sold;

(d) The value of inventory is recognized as an expense in the period;

(e) The value of inventory write-offs is recognized as an expense in the period as prescribed in paragraph 40;

(f) The reversal value of inventory write-offs recognized in the statement of income for the period as required by paragraph 40;

(g) The circumstances or events that result in the reversal of inventory write-downs as provided for in paragraph 40; and

(h) The carrying value of inventory pledged as collateral for liabilities.

44. Information about the book value of different types of inventory held and the rate of change of these assets is useful to users of financial statements. Inventory is typically classified as goods, materials, tools and equipment, work-in-progress, and finished goods. Inventory of a service provider may be described as work-in-progress.

45. Inventory costs recognized as expenses in the period include: costs previously included in the inventory value that have now been sold, exchanged, or distributed; unallocated overhead costs; and inventory production costs incurred above normal levels. In some cases, the entity may include other costs, such as distribution costs.

46. ​​In cases where an entity applies a method of reporting operating results in which the value of inventory is not presented as an expense item during the period, the entity presents an analysis of expenses based on their nature. In this case, the entity must present the expenses recognized during the period for: raw materials and supplies, labor costs and other expenses, along with the net change in inventory value during the period.

Reference table of paragraphs of Vietnamese public sector accounting standards compared with paragraphs of international public sector accounting standards.

VPSAS number 12	IPSAS number 12
1	1
2	2
3	3
4	7
5	8
6	9
7	10
8	11
9	12
10	13
11	14
12	15
13	16
14	17
15	18
16	19
17	20
18	21
19	23
20	24
21	25
22	26
23	27
24	28
25	29
26	30
27	31
28	32
29	33
30	34
31	35
32	36
33	37
34	38
35	39
36	40
37	41
38	42
39	43
40	44
41	45
42	46
43	47
44	48
45	49
46	50