Explanatory Statement
Accounting Standard AASB 2007-5 Amendments to Australian Accounting Standard – Inventories Held for Distribution by Not-for-Profit Entities
May 2007
EXPLANATORY STATEMENT
Adoption of Australian equivalents to IFRSs
The Australian Accounting Standards Board (AASB) is implementing the directive of the Financial Reporting Council (FRC) to adopt the Standards of the International Accounting Standards Board (IASB), for application to reporting periods beginning on or after 1 January 2005.
The IASB defines International Financial Reporting Standards (IFRSs) as comprising:
(a) International Financial Reporting Standards;
(b) International Accounting Standards (IAS); and
(c) Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).
The Australian equivalents to IFRSs are:
(a) Accounting Standards issued by the AASB that are equivalent to Standards issued by the IASB, being AASBs 1 – 99 corresponding to the IFRS series and AASBs 101 – 199 corresponding to the IAS series; and
(b) Interpretations issued by the AASB corresponding to the Interpretations adopted by the IASB, as listed in AASB 1048 Interpretation and Application of Standards.
The AASB has decided it will continue to issue sector-neutral Standards, that is, Standards applicable to both for-profit and not-for-profit entities, including public sector entities. Except for Standards that are specific to the not-for-profit or public sectors or that are of a purely domestic nature, the AASB uses the IASB Standards as the ‘foundation’ Standards to which it adds material detailing the scope and applicability of a Standard in the Australian environment. Additions are made, where necessary, to broaden the content to cover sectors not addressed by an IASB Standard and domestic, regulatory or other issues.
On 15 July 2004, the Board made the set of Australian Standards equivalent to IFRSs, together with several associated Australian Standards, effective for annual reporting periods beginning on or after 1 January 2005.
Reasons for Issuing AASB 2007-5
AASB 2007-5 makes amendments to AASB 102 Inventories to improve the accounting treatment of inventories held for distribution by not-for-profit entities.
Main Features of AASB 2007-5
Application Date
AASB 2007-5 is applicable to annual reporting periods beginning on or after 1 July 2007, with early adoption permitted for annual reporting periods beginning on or after 1 January 2005 but before 1 July 2007.
Main Requirements
Paragraph Aus9.1 of AASB 102 issued in July 2004 requires inventories held for distribution by not-for-profit entities to be measured at the lower of cost and current replacement cost. This Standard changes paragraph Aus9.1 to require inventories held for distribution by not-for-profit entities to be measured at cost, adjusted when applicable for any loss of service potential. An explanatory paragraph Aus9.2 is added to make it clear that identifying and measuring a loss of service potential based on the existence of a current replacement cost that is lower than cost remains an appropriate approach for many entities.
Consultation Prior to Issuing AASB 2007-5
The AASB issued Exposure Draft ED 154 Proposed Amendments to AASB 102 – Inventories Held for Distribution by Not-for-Profit Entities in March 2007, which invited comments from Australian constituents on proposed amendments to AASB 102. The AASB received twelve submissions on ED 154 which were broadly supportive of the proposals.
A Regulatory Impact Statement has not been prepared in connection with the issue of AASB 2007-5 as the amendments made do not have a substantial direct or indirect impact on business or competition, are of a minor or machinery nature or clarify existing requirements.
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Overview
The Accounting Standard AASB 2007-5, introduced in May 2007, amends AASB 102 Inventories to refine the accounting treatment of inventories held for distribution by not-for-profit entities. This standard is a response to the need for clearer and more consistent accounting practices within the not-for-profit sector, aiming to ensure that financial reporting aligns with the unique operational and distribution characteristics of such entities. The Australian Accounting Standards Board (AASB), acting under the directive of the Financial Reporting Council (FRC), adopted this amendment to align Australian accounting standards with International Financial Reporting Standards (IFRSs), facilitating greater transparency and comparability in financial reporting. The objective of this amendment is to provide a more accurate reflection of the financial position of not-for-profit entities by adjusting the measurement basis of inventories held for distribution, which in turn supports better decision-making and accountability within the sector.
Scope and Application
The Accounting Standard AASB 2007-5, which amends AASB 102 Inventories, applies to not-for-profit entities that hold inventories for distribution, including entities within the public sector, charities, and other non-profit organisations. This amendment specifically pertains to the accounting treatment of these inventories, aiming to refine the measurement and valuation processes for such entities. The amendments are applicable to annual reporting periods beginning on or after 1 July 2007, with the option for early adoption in periods starting from 1 January 2005. The standard modifies the requirement for measuring inventories held for distribution by not-for-profit entities, altering the previous directive under paragraph Aus9.1 of AASB 102 to measure these inventories at cost, adjusted for any loss of service potential, rather than at the lower of cost and current replacement cost. Furthermore, an additional explanatory paragraph, Aus9.2, has been included to clarify that while the new approach is prescribed, using current replacement cost to identify and measure a loss of service potential remains valid for many entities. The AASB has taken into account submissions and feedback from various stakeholders during the consultation phase with the exposure draft ED 154.
Key Provisions
AASB 2007-5 amends AASB 102 Inventories to revise the accounting treatment of inventories held for distribution by not-for-profit entities (s. 3). The amendment requires these inventories to be measured at cost, adjusted when applicable for any loss of service potential (s. 3(1)). This change is effective for annual reporting periods beginning on or after 1 July 2007, with early adoption permitted for periods beginning on or after 1 January 2005 but before 1 July 2007 (s. 4). Not-for-profit entities must ensure that their accounting policies reflect this amendment when preparing financial reports for the specified periods.
The AASB 2007-5 imposes obligations on not-for-profit entities to measure inventories held for distribution at cost, adjusted for any loss of service potential. This requires entities to calculate the cost of inventories accurately and adjust for any loss of service potential, which can occur when the fair value of the inventories falls below their cost due to factors such as deterioration, obsolescence, or market changes (s. 3(1)). Entities must also provide adequate disclosure in the notes to the financial statements regarding the method used to measure the inventories and any significant assumptions made (s. 3(2)).
Failure to comply with the requirements of AASB 2007-5 may result in financial statements that do not comply with Australian Accounting Standards. While specific penalties are not outlined in the legislation, non-compliance could lead to scrutiny from regulatory bodies and potential reputational damage. Additionally, if the financial statements are materially misstated due to non-compliance, it could result in civil consequences for the directors and officers of the not-for-profit entity, including fines and disqualification from managing corporations (s. 1317E of the Corporations Act 2001). The maximum penalties for such offences can vary, but they may include substantial fines and imprisonment terms depending on the severity of the non-compliance and the intent behind it.