Accounting Principle Research - Inventory - Comparison of VAS and IAS

Project 1:
INVENTORIES – A COMPARISON
OF VAS AND IAS
KT205DE01







Lecturer: PhD. Nguyễn Thanh Nam

December 19
th
, 2012
FACULTY OF ECONOMICS
AND COMERCE
HOA SEN
UNIVERSITY

FACULTY OF ECONOMICS AND COMERCE






Project 1:
INVENTORIES – A COMPARISON
OF VAS AND IAS
KT205DE01

Members
Nguyễn Thị Hoàng Yến 093400
Trương Thúy Vi 093395
Đoàn Diệp Bích Ngân 101439

December 19
th
, 2012
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ABSTRACT
The System of International Accounting Standards (IAS) is the principled
standards which have been adopted by many countries and enterprises around the
world. In this report, we would like to compare the "Inventories" account based
International Accounting Standards (IAS) and Vietnamese Accounting Standards
(VAS) to find out similarities and differences. Thereby we would like to enhance
the professional knowledge and also learn, get familiar with the legal provisions
related to the field of accounting.
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TABLE OF CONTENT

ABSTRACT i
TABLE OF CONTENT ii
ACKNOWNLEDGEMENTS iii
PREFACE iv
1. INTRODUCTION 1
1.1. Introduction of Accounting Standards applying to "Inventories” 1
2. COMPARISON OF IAS 2 AND VAS 2 3

2.1. General Provisions 3
2.2. Contents of the Standard 3
3. CONCLUSION AND SUGGESTION 15
3.1. Conclusion 15
3.2. Suggestion 15
APPENDIX 16
REFERENCES 26
SUPPERVISOR‟S REMARK 27

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ACKNOWNLEDGEMENTS
First and foremost we offer our sincerest gratitude to our project supervisor, Mr.
Nguyen Thanh Nam, who has supported us throughout our project with his professional
guidance and valuable support. His willingness to give his time so generously has been
very much appreciated.
Special thanks should be given to Mr. Ho Sy Tuy Duc for his useful and
constructive recommendations on this project.

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PREFACE
During the twelve week of studying and researching, our group has
synthesized the knowledge of the rules and principles from the two systems of
International Accounting Standards (IAS) and Vietnamese Accounting Standards
(VAS) which relate to "Inventories" Account. In the following, we will briefly
introduce the two above-mentioned accounting standards system as well as the
differences between them.

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1. INTRODUCTION
1.1. Introduction of Accounting Standards applying to "Inventories”
International Accounting Standards (IAS) is the harmonization of regulations,
accounting principles and methods to be accepted, acknowledged a general practice
among the countries. However, the harmony that cannot be forced all countries to
comply with the accounting records and present financial statements in accordance
with the provisions of International Accounting Standards. Because each country has
conditions and different level of economic development, and management degree
requirements are not quite the same. Therefore, based on the platform of International
Accounting Standard system to develop and promulgate national accounting standards
system is an indispensable need. Vietnamese Accounting Standards (VAS) is no
exception to that practice.
Before opening and integration, Vietnam has no accounting standards, only the
accounting regimes. Accounting regimes are defined by the Ministry of Finance
(MOF). They were mainly to guide the state-owned enterprises and cooperatives
perform accounting work. At the end of 2001, MOF issued the first four Vietnamese
accounting standards. By December 2005, the MOF has issued all 26 accounting
standards.
Within the scope of this report, the aim of this paper is to discuss about the
comparison of Accounting Standards applying to “Inventory” of IAS and VAS to find
the similarities and differences between them.
Introduction of Accounting Standards “Inventories”
Accounting standards are regulations and guidance on the accounting
principles and methods as the basis for the accounting records and financial
statements.
Standards “Inventory” is built to regulate and guide the principles and methods
of inventory accounting to reflect on the account a reasonably accurate basis for the

preparation of reports finance.
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International Accounting Standard No. 2 “Inventories” (IAS 2) is issued,
published in 1975. Vietnamese Ministry of Finance based on the International
Accounting Standards and the actual conditions issued Accounting Standards
"Inventories" (VAS 2) dated December 31, 2001.
On the basis of the content of the standards "Inventory" is defined in IAS 2 and
VAS 2, this study will focus on the comparison of the similarities and differences
between them.

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2. COMPARISON OF IAS 2 AND VAS 2
For comparing IAS 2 and VAS 2, we make the basic contents: General
Provisions, content standards, regulations on the establishment and presentation of
financial statements
2.1. General Provisions
Both standards “Inventory” of the International Accounting Standards and
Vietnamese Accounting Standards all have the same purpose as regulations and
guidance on the principles and methods of inventory accounting. Including: Define
inventory; Accounting principles applied to inventory; Valuation of inventories;
Method of calculating the value of inventory as a basis for accounting entries and
financial statements.
Standards “Inventory” of the Vietnamese accounting and international scope as
follows: This standard applies to all inventory assets, including:
o assets held for sale in the ordinary course of business (finished goods);
o assets in the production process for sale in the ordinary course of business

(work in process);
o and materials and supplies that are consumed in production (raw materials);
o For the service provider, inventories include the cost of services
corresponding to deferred revenue.
The principles are applied in accounting standards inventory: principle of
prudence, principle of consistency and matching principle.
2.2. Contents of the Standard
2.2.1. Determination of Value of Inventories
An inventory valuation allows a company to provide a monetary value for
items that make up their inventory. Inventories are usually the largest current asset of
a business, and proper measurement of them is necessary to assure accurate financial
statements. If inventory is not properly measured, expenses and revenues cannot be
properly matched and a company could make poor business decisions.
Inventories are assets:
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o Held for sale in the ordinary course of business
o In the process of production for such sale
o In the form of materials or supplies to be consumed in the production
process or in the rendering of services.
Net realizable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs necessary to
make the sale.
Inventories encompass goods purchased and held for resale, for example,
merchandise purchased by a retailer and held for resale, computer software held for
resale, or land and other property held for resale. Inventories also encompass finished
goods produced, or work in progress being produced, by the enterprise and include
materials, maintenance supplies, consumables and loose tools awaiting use in the
production process. Inventories do not include machinery spares which can be used

only in connection with an item of fixed asset and whose use is expected to be
irregular; such machinery spares are accounted for in accordance with Accounting
Standard (AS) 10, Accounting for Fixed Assets.
The valuation of inventory involves:
o The establishment of physical existence and ownership;
o The determination of unit costs;
o The calculation of provisions to reduce cost to net realizable value, if
necessary
The resulting evaluation is then disclosed in the financial statements.
These definitions appear to be very precise. We shall see, however, that
although IAS 2 was introduced to bring some uniformity into financial statements,
there are many areas where professional judgment must be exercised. Sometimes this
may distort the financial statements to such an extent that we must question whether
they do represent a „true and fair‟ view.

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2.2.2. Method of Calculating Value of Inventories
According to the IAS 2, the acceptable methods of inventory valuation include
FIFO, AVCO and standard cost.
a) First-in-first-out (FIFO)
Inventory is valued at the most recent „cost‟, since the cost of oldest inventory
is charged out first, whether or not this accords with the actual physical flow.
As a formula it would look like this:
Unit Cost per batch = (Cost/Quantity) for each batch
Where:
Cost of Goods Sold = (Unit Cost x Quantity) for each batch

Receipts

Issues

Balance
Date
Quantity
Rate
£

Quantity
Rate
£

Quantity
Rate
£
January
10
15
150





10

150
February

8
15
120

2

30
March
10
17
170





12

200
April
20
20
400

32

600
May




2
15
30









10
17
170

12
20
240









Cost of goods sold
560









Inventory


8

20
160

b) Average cost (AVCO)
Inventory is valued at a „weighted average cost‟, i.e. the unit cost is weighted
by the number of items carried at each „cost‟. This is popular in organisations holding
a large volume of inventory at fluctuating „costs‟. The practical problem of actually
recording and calculating the weighted average cost has been overcome by the use of
sophisticated computer software.

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Receipts

Issues

Balance
Date
Quantity
Rate
£

Quantity
Rate
£

Quantity
Rate

£
January
10
15
150





10

150
February




8
15
120

2

30
March
10
17
170

12

200
April
20
20
400





32

600
May




24
18.75
450

600





Cost of goods sold
570









Inventory


8
18.75
150

The equation for average cost method is as follows.
 



Where:

Cost of Goods Sold = (Average Unit Cost) x (Number of Units Sold)
c) Standard cost
In many cases this is the only way to value manufactured goods in a high-
volume / high turnover environment. However, the standard is acceptable only if it
approximates to actual cost. This means that variances need to be reviewed to see if
they affect the standard cost and for inventory evaluation.
d) Retail method
IAS 2 recognizes that an acceptable method of arriving at cost is the use of
selling price, less an estimated profit margin. This method is only acceptable if it can
be demonstrated that the method gives a reasonable approximation of the actual cost.
IAS 2 does not recommend any specific method. This is a decision for each
organization based upon sound professional advice and the organization‟s unique
operating conditions.

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However, the differences between IAS2 and VAS2 are: VAS2 also has the
same method of calculating value of inventories as IAS2. However, VAS2 has not
eliminated the LIFO method and doesn‟t mention the Standard cost method.
For Last-in-first-out (LIFO):
The cost of the inventory most recently received is charged out first at the most
recent „cost‟.
The practical upshot is that the inventory value is based upon an „old cost‟,
which may bear little relationship to the current „cost‟

Receipts

Issues

Balance
Date
Quantity
Rate
£

Quantity
Rate
£

Quantity
Rate
£
January
10
15
150





10

150
February

8
15
120

2

30
March
10
17
170





12

200
April
20
20
400





32

600
May




20
20
400









4
17
68

Cost of goods sold
588









Inventory


8

132
May closing balance = [(2 x 15) + (6 x 17)]






2.2.3. Allowance for inventory obsolescence
Inventory obsolescence is when inventory is no longer salable. Possibly due to
too much inventory on hand, out of fashion or demand. The true value of the
inventory is seldom exactly what is shown on the balance sheet. Often, there is
unrecognized obsolescence.
o Starting from the precautionary principle is not rated higher than the value

of the asset.
o The cause of the net realizable value is less than the original price:
inventory is damaged, obsolete; reduced price; finishing costs, cost of sales
increased
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According to IAS 2, mention the provision of net realizable value and the value
may be lower than the original cost. The writing off of inventories to net realizable
value is consistent with the principle of recorded assets, which means assets are
recorded not more than the actual value is estimated from the selling or using them.
According to VAS 2:
o At the end of the accounting year, when the net realizable value of
inventories is lower than the original cost, we must make the provision for
devaluation of stocks. The provision for devaluation of stocks which is
made is the difference between the original cost of inventory and the net
realizable value (original cost > net realizable value). The provision for
devaluation of stocks is made on the basis of each inventory. For services
provided in progress, the provision for devaluation of stocks is calculated
for each type of service with a separate price.
o Making provision is when there is price changing, direct costs relate to
events occurring after the end of the fiscal year, these events are confirmed
with the conditions that were estimated at that time.
o The special cases: When the merchandise inventories are larger than
requirements, the difference, the net value is assessed on the basis of
estimated selling prices. Raw materials, supplies, tools to use reserves for
production purposes must not be estimated lower than the original cost if
the products that they help to make up will be sold at or above production
cost. When there is a decrease in the price of raw materials, materials, tools
and instruments but the production costs is higher than net realizable value,

the materials, tools, equipment are evaluated lower to be equal with net
realizable value.
o Reversal of provision: Ensuring the appropriate principles between costs
and revenues in the accounting period.
Example: At the end of 2010, the company A discounted its inventory to 1000,
original cost is 50, estimated selling price is 45, and selling expense is 2. In 2011, the
value of inventories of company A was reduced to 4000. At the end of 2011, the
provision for devaluation of stocks for the next year was 3000.
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In 2011
Dr 632: 4000
Cr 159: 4000
At the end of 2011
Dr 632: 3000
Cr 159: 3000
2.2.4. Recognition as an Expense
IAS 2 specified items that are recognized as costs are: value of inventory is
sold; adjustments of reducing net realizable value; loss of inventory; extraordinary
waste; factory overhead costs are not disclosed.
VAS 2: When you sell inventory, cost of inventory sold is recorded as cost of
production, sales in the period in accordance with related revenues are recorded. All
the differences between the provision for devaluation of stocks that is made at the end
of the accounting year have to be greater than the provision for devaluation of stocks
that set up at the end of the accounting year, the loss of inventory, after deducting the
compensation caused by personal responsibility, and general production costs not
allocated, are recorded as general and admin expense in the period. In case of the
provision for devaluation of stocks is made at the end of this accounting year less than
the provision for devaluation of stocks that was set up at the end of the previous

accounting year, the larger difference is reversed to reduce the cost of manufacture
and trading.
Recognizing the value of inventory and putting it into this period expenses
have to ensure the principle of matching of costs and revenues.
2.2.5. Effect of method of calculating value of inventories on a company’s
financial statement
Inventory valuation method that businesses apply can directly affect the
Balance Sheet, Income Statement and Cash Flow Statement of the business. Because
the cost of goods sold reflected in the Income Statement and the value of ending
inventory is shown in the Balance Sheet.
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Without inflation, the methods of calculating value of inventory will give the
same results. However, in the long term period, prices tend to increase. If the price
increases gradually, each accounting method for calculating value of inventory will
give the following results:
o FIFO method: Make high value of ending inventory but does not reflect the
real value (reflected on Balance Sheet), but it also increases the net profit
because the inventory of few years ago may be used to determine the cost of
goods sold. Because this method ensures the compatibility between current
revenue and current expenses, it reflects the profit of the business, creating
"the inventory profit". However, it is also a potential to increase the
enterprise income tax payable.
o LIFO method: Make low value of ending inventory value but does not
reflect the real value (reflected on Balance Sheet). This is the result of the
calculation that make the value of ending inventory much lower than the
current price. This method gives results in lower net income because cost of
goods sold is determined to be higher.
o The average cost method: Do not associated revenue and stock-out at the

point of time, but the average stock price. When the unit price increase or
decrease, the total cost of stock-out will be in the middle of the value of
inventory under FIFO and LIFO methods.
Although LIFO method has certain advantages but in general, the application
of the LIFO method can have some negative impacts. The reasons not to adopt this
method are:
o In the long term period, when prices rise, the value of inventory is reflected
lower than its value. Therefore, the inventory targets on the Balance Sheet
do not reflect closely to the market price at the time of reporting, which
leads to the value assets of the business are recorded lower than its actual
value.
o This method can distort the profit in the period, create the
misunderstanding about the profitability of the business.
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o This method can distort the affection on the Balance Sheet because the
value of inventory is often reflected by the oldest prices, make the working
capital is often reflected wrongly.
o LIFO method causes the incompatibility between the value of inventory
and the materials of specific goods. This makes the value of inventory in
the financial statements do not reflect the nature of its economy.
o In the case where there is no effect of tax, this method creates loopholes
for managers to cheat on company‟s profit.
2.2.6. Presentation of Financial Statements
For preparing financial statement, there are some similarities and differences
between International Accounting Standard and Vietnamese Accounting Standard.
i. In their financial statements, the enterprises must present:
o For Vietnamese Accounting Standard:
a) Accounting policies applied in the appraisal of inventories, including

the method of computing the value of inventories;
b) The original prices of the total inventories and of each kind of
inventories which are classified in a suitable way to the enterprise;
c) The value of the inventory price decreases reserve;
d) The value re-included from the inventory price decreases reserve;
e) Cases or events resulting in the addition to or re-inclusion from the
inventory price decrease reserve;
f) The book value of inventories (the original price minus (-) the
inventory price decrease reserve) already mortgaged or pledged for
payable debts.
o For International Accounting Standard:
a) Disclosures needed for:
 Accounting policies applied adopted in measuring inventories,
including the cost formula used.
 Inventory remaining on statement of financial position
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 Inventory costs recognized in profit or loss
b) In balance sheet:
 Carrying amount in each category of inventory (materials, Work-
In-Process, finished goods, production supplies, merchandise)
and in total
 Carrying amount of any inventory measured at fair value less
costs to sell
 Carrying amount of inventory pledged as collateral for liabilities
c) In income statement:
 Amount of inventory recognized as an expense (usually cost of
sales/cost of goods sold)
 Amount of write-downs to net realizable value or other losses

 Amount of any write-down reversals
 Circumstances that resulted in reversals
o For Vietnamese Accounting Standard:
ii. Where the enterprises compute the value of inventories by the Last-in, First-
out method, their financial statements must show the difference between the
value of inventories presented in the accounting balance sheet and:
a) The period-end value of inventories, which is calculated by the First-in,
First-out method (if this value is lower than the period-end value of
inventories calculated by the weighted average method as well as the net
realizable value).
b) The period-end value of inventories which is calculated by the weighted
average method (if this value is lower than the period-end value of
inventories calculated by the First-in, Fist-out method as well as the net
realizable value).
c) The period-end value of inventories which is calculated according to the
net realizable value (if this value is lower than the value of inventories
calculated by the First-in, First-out method and the weighted average
method)
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d) The period-end current value of inventories on the date the accounting
balance sheet is made (if this value is lower than the net realizable
value); or, and the net realizable value (if the period-end value of
inventories which is calculated according to the net realizable value is
lower than the period-end value of inventories which is calculated
according to the current value on the date the accounting balance sheet
is made).
iii. Presentation of inventories costs in the reports on the production and
business results, which are classified functionally.

iv. Functional classification of costs means that inventories are presented in the
section “Original price of goods sold” in the business result reports,
including the original price of goods sold, the inventory price decrease
reserve, damaged and lost volumes of inventories after subtracting the
compensations paid by individuals due to their liabilities, and unallocated
general production costs
o For International Accounting Standard:
ii. The carrying amount of inventories pledged as security for liabilities.
iii. Information about the carrying amounts held in different classifications of
inventories and the extent of the changes in these assets is useful to
financial statement users. Common classifications of inventories are
merchandise, production supplies, materials, work in progress and finished
goods. The inventories of a service provider may be described as work in
progress.
iv. The amount of inventories recognized as an expense during the period,
which is often referred to as cost of sales, consists of those costs previously
included in the measurement of inventory that has now been sold and
unallocated production overheads and abnormal amounts of production
costs of inventories. The circumstances of the entity may also warrant the
inclusion of other amounts, such as distribution.
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v. Some entities adopt a format for profit or loss that results in amounts being
disclosed other than the cost of inventories recognized as an expense during
the period. Under this format, an entity presents an analysis of expenses
using a classification based on the nature of expenses. In this case, the
entity discloses the costs recognized as an expense for raw materials and
consumables, labour costs and other costs together with the amount of the
net change in inventories for the period.

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3. CONCLUSION AND SUGGESTION
3.1. Conclusion
Vietnamese Accounting Standards issued are relatively tight and detailed.
However, Vietnam has been increasing integration into the world economy. It is
necessary to adjust not only business methodology but also the regulations and
accounting standards system. Therefore, Vietnamese enterprises are easier to approach
international practices and standards. Then they can expand their market and business
environment.
Until now, it is almost that only FDI companies whose holding company uses
International Accounting Standard (IAS) and International Financial Reporting
Standard (IFRS) use these standards. IAS and IFRS are suitable for the companies
which are:
o Big company like group or corporation
o To have a wider and better view about their value.
o To want to trade, merge or attract a new investor.

3.2. Suggestion
While study and research, we have some concerns as follows: International
Accounting Standard IAS 2 amended 12/2003 LIFO method (Last In - First out) in
valuation of inventory. Should VAS continue to apply or remove this method?
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APPENDIX
These are illustrative examples of Income Statement and Trial Balance
according to International Accounting Standard.

3G Company, Ltd locates in United State of America. On December 31
st
, 2012,
the company‟s chief accountant prepares Income Statement and Trial Balance
according to International Accounting Standard.
Significant accounting policies notes to the financial statements:
o Inventories are measured at the lower of cost and realizable value.
o The cost of inventories is based on First-in First-out principle, and includes
expenditure incurred in acquiring the inventories, production or conversion
costs, and other costs incurred in bringing them to their existing location
and condition.
o Net realizable value is the estimated selling price in the ordinary course of
business, less the estimated costs of completion and estimated costs
necessary to make the inventories.
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3G Company, Ltd.
Income Statement
For the Year Ended December 31, 2012
USD







Revenue:

Gross Sales



$3,800,000

Less:
Sales Returns and Allowances

$50,000

Net Sales



$3,750,000







Cost of Goods Sold:

Beginning Inventory
$30,000



Add:
Purchases
$45,000




Freight-in

$28,000




Direct Labor
$68,000




Direct Material

$55,000




Indirect Expenses
$40,000






$266,000



Less:
Ending Inventory
$30,000



Cost of Goods Sold


$236,000

Gross Profit (Loss)


$3,514,000







Expenses:






Advertising

$250,000



Bad Debts

$300,000



Bank Charges

$1,200



Delivery Expenses
$250,000



Depreciation

$24,000



Insurance

$180,000



Interest

$20,000



Maintenance

$20,000



Miscellaneous

$30,000



Office Expenses

$25,000



Operating Supplies
$19,000



Payroll Taxes

$7,000

Property Taxes

$30,000



Repairs

$5,000



Utilities

$8,600



Vehicle Expenses
$80,000


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Wages

$960,000



Total Expenses



$2,209,800








Net Operating Income


$1,304,200







Other Income:

Gain (Loss) on Sale of Assets
$0



Interest Income

$12,000



Total Other Income


$12,000







Income before tax

$1,316,200
Income tax expense



$460,670
Net Income



$855,530

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3G Company, Ltd.
Trial Balance Worksheet
December 31, 2012
USD


General Ledger


Account Balance

Account Name

Debit

Credit
Petty cash

$52,780


Cash

$2,000,000


Accounts receivable

$800,000


Reserve for bad debts



$50,000
Inventory

$30,000


Prepaid insurance

$180,000

Office supplies

$50,000


Utility deposits

$9,800


Notes receivable

$700,000


Vehicles

$650,000


Accumulated depreciation - vehicles

$32,500

$0
Equipment

$935,000

Accumulated depreciation - equipment

$63,500

$0
Buildings

$1,000,000


Accumulated depreciation - buildings

$100,000

$0
Land

$850,000


Other intangible assets

$600,000


Accounts payable

$50,000
Sales tax payable



$300,000
Federal withholding taxes payable



$7,680
FICA taxes payable



$72,000
State withholding taxes payable



$51,840
Unemployment taxes payable



$96,000
Unearned revenue

$0
Accrued income taxes



$0
Bank loan payable



$200,000
Notes payable



$0
Owner's equity



$2,000,000
Owner's drawing account

$0


Retained earnings

$855,530
Sales



$3,750,000
Revenues



$3,800,000