Cost Adjusted when Applicable for Any LoCost Adjusted when Applicable for Any Loss of Service Potential

Cost Adjusted when Applicable for Any Loss of Service Potential

BC12 The Board noted that the lower of cost and net realisable value requirement in AASB 102 in respect of inventories other than those held for distribution can be viewed as being based on a notion of recognising a loss of service potential in a for-profit environment. That is, an entity that seeks to sell inventories for more than they cost generally considers the service potential of those inventories in financial terms. If net realisable value falls below cost, the entity can be viewed as suffering a loss of service potential.

BC13 The Board observed that the lower of cost and current replacement cost requirement for measuring inventories held for distribution by not-for-profit entities can be viewed as seeking to emulate the approach taken for other inventories and its focus is also on a loss of value in financial terms. However, the Board considered that this financial measure of the loss of service potential may not always be the most relevant measure in respect of inventories held for distribution by not-for-profit entities for the reasons outlined in paragraph BC6.

BC14 The Board considered that the measurement of inventories held for distribution by not-for-profit entities at cost, adjusted when applicable for any loss of service potential, is consistent with the Framework for the Preparation and Presentation of Financial Statements, which notes at paragraph Aus49.1:

In respect of not-for-profit entities in the public or private sector, in pursuing their objectives, goods and services are provided that have the capacity to satisfy human wants and needs. Assets provide a means for entities to achieve their objectives. Future economic benefits or service potential is the essence of assets. Future economic benefits is synonymous with the notion of service potential, and is used in this Framework as a reference also to service potential. Future economic benefits can be described as the scarce capacity to provide benefits to the entities that use them, and is common to all assets irrespective of their physical or other form.

BC15 The Board noted that a fall in the current replacement cost of inventories held for distribution may at times indicate a loss of service potential, but that this is not necessarily always the case, and that a loss of service potential may at times be identified on other, more relevant, bases. For example, obsolescence, which may occur with or without there being a fall in current replacement cost, may be the main factor leading to a loss of service potential for many not-for-profit entities. The term ‘obsolescence’ covers both ‘technical obsolescence’ and ‘functional obsolescence’. Technical obsolescence occurs when an item still functions for some or all of the tasks it was originally acquired to do, but no longer matches existing technologies. Functional obsolescence occurs when an item no longer functions the way it did when it was first acquired. In either case, a loss of service potential may need to be recognised.