Ministry of Finance Accounting Standards for Business Enterprises No.1 – Inventories Cai Kuai [2006] No.3 February 15, 2006 Chapter I General Provisions Article 1 These Standards are formulated in accordance with the Accounting Standards for Enterprises – Basic Standards for the purpose of regulating Article 2 Other relevant accounting standards shall apply to such items as follows: (1) The Accounting Standard for Business Enterprises No. 5 – Biological Assets shall apply to the consumptive biological assets. (2) The Accounting Standard for Business Enterprises No. 15 – Construction Contracts shall apply to the costs of the inventories together Chapter II Recognition Article 3 The term “inventories” refers to finished products or merchandise possessed by an enterprise for sale in the daily of business, or Article 4 The inventories shall not be recognized unless they satisfy such conditions simultaneously as follows: (1) The economic benefits pertinent to the inventories are likely to flow into the enterprise; and (2) The cost of the inventories can be measured reliably. Chapter III Measurement Article 5 The inventories shall be initially measured in light of their cost. The cost of inventory consists of purchase costs, processing costs Article 6 The purchase costs of inventories consists of the purchase price, relevant taxes, transport fees, loading and unloading fees, insurance Article 7 The processing costs of inventories consist of the direct labor and production overheads allocated according to a particular method. The “production overheads” refers to all indirect expenses happened in the process of manufacturing products and providing labor services If two or more kinds of products are manufactured in the same production process, and the processing cost for each product is unable Article 8 “Other costs of inventories” refers to those costs, other than purchase costs and processing costs, happened in bringing the inventories Article 9 The following expenses shall be recognized as current profits and losses as they are happened, which shall not be included in the (1) The direct materials, direct labor and production overheads that are abnormally consumed; (2) The storage expenses (excluding the expenses which are necessary in the production process for reach the next production stage); and (3) Other expenses that cannot be included in the costs happened in bringing the inventories to their present location and condition. Article 10 The borrowing costs, which shall be included in the cost of inventories, shall be disposed in accordance with the Accounting Standard Article 11 The cost of inventories invested by an investor shall be ascertained in accordance with the value as stipulated in the investment Article 12 The cost of agricultural products in the harvest, and the cost of inventories obtained by the exchange of non-monetary assets, recombination Article 13 Where an enterprise provides labor service, the direct labor expenses, other direct expenses as well as the indirect expenses included Article 14 An enterprise shall confirm the actual cost of sending out inventories by employing the first-in-first-out method, the weighted average The cost of sending out inventories of items with similar nature and purpose shall be confirmed by employing the same cost calculation Generally, the cost of non-substitutable inventories, and goods purchased and produced as well as the labor services offered for specific As to the inventories, which have been already sold, their costs shall be carried forward as the current profits and losses and the Article 15 On the date of balance sheet, the inventories shall be measured whichever is lower in accordance with the cost and the net realizable If the cost of inventories is higher than the net realizable value, the provision for the loss on decline in value of inventories The net realizable value refers to in the daily business activity the amount after deducting the estimated cost of completion, estimated Article 16 An enterprise shall confirm the net realizable value of inventories on the ground of reliable evidence obtained, taking into consideration The materials held for production shall be measured at cost if the net realizable value of the finished products is higher than the Article 17 The net realizable value of inventories held for the execution of sales contracts or labor contracts shall be calculated on the ground If an enterprise holds more inventories than the quantities subscribed in the sales contract, the net realizable value of the excessive Article 18 Ordinarily an enterprise shall make provision for loss on decline in value of inventories on the ground of each item of inventories. For inventories with large quantity and relatively low unit prices, the provision for loss on decline in value of inventories shall For the inventories related to the series of products manufactured and sold in the same area, and of which the final use or purpose Article 19 An enterprise shall confirm the net realizable value of inventories on the balance sheet date. If the factors causing any write-down Article 20 An enterprise shall amortize the easily consumed products of low value and packing articles and supplies by employing the one-off Article 21 For any damage to the inventories of an enterprise, the enterprise shall include the amount after deducting the book value and relevant The loss of inventories shall be included in the current profits and losses. Chapter IV Disclosure Article 22 An enterprise shall, in the notes, disclose the information concerning to inventories as follows: (1) The book value of all inventories at the beginning and end of the period; (2) The methods to confirm the cost of sending out inventories; (3) The basis for confirming the net realizable value of inventories, the methods to make provision for the loss on decline in value of (4) The book value of inventories used for a guaranty. |
Ministry of Finance
2006-02-15